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

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

Marcial Esposo for plaintiff-appellant.

Office of the Solicitor General Arturo A. Alafriz, Assistant Solicitor General Antonio G. Ibarra and Attorney Concepcion Torrijos-Agapinan for defendants-appellees.

 

DIZON, J.:

An appeal from a decision of the Court of First Instance of Manila dismissing the complaint filed by the Philippine Education Co., Inc. against Mauricio A. Soriano, Enrico Palomar and Rafael Con-treras.

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 knowl-edge 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 Secre-tary 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 rep-resented 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 ac -count;

(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 coun-termand the notice given to the Bank of America on September 27, 1961, de-ducting 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 pronounce-ment as to cost and attorney's fees.

The case was appealed to the Court of First Instance of Manila where, after the parties had resub-mitted 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 exer-cises 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 in-stance, 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 re -demption 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 lat-ter is therefore bound by them. That it is so is clearly referred from the fact that, upon receiving ad -vice that the amount represented by the money order in question had been deducted from its clear -ing 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 condi -tions thereof on the ground that the letter setting forth the terms and conditions aforesaid is void be-cause it was not issued by a Department Head in accordance with Sec. 79 (B) of the Revised Ad -ministrative Code. In reality, however, said legal provision does not apply to the letter in question because it does not provide for a department regulation but merely sets down certain conditions upon the privilege granted to the Bank of Amrica to accept and pay postal money orders presented for payment at the Manila Post Office. Such being the case, it is clear that the Director of Posts had ample authority to issue it pursuant to Sec. 1190 of the Revised Administrative Code.

In view of the foregoing, We do not find it necessary to resolve the issues raised in the third and fourth assignments of error.

WHEREFORE, the appealed decision being in accordance with law, the same is hereby affirmed with costs.

G.R. No. 104781 July 10, 1998

CALTEX (PHILIPPINES), INC., petitioner,

vs.

COURT OF APPEALS and COMMISSIONER OF CUSTOMS, respondents.

 

ROMERO, J.:

Caltex, a corporation engaged in the oil industry, imported on various dates in 1982 light/medium mix special oil and heavy crude oil for which it was assessed the following ad valorem duties by the Collector of Customs:

1. P97,697.143 — for the importation which arrived on April 10, 1982

2. P119,572.319 — for the importation which arrived on June 7, 1982

3. P60,769.00 — for the importation which arrived on July 9, 1982

The basis of the assessments was a memorandum dated January 26, 1971, issued by then Acting Commissioner of Customs which provided that the duties and taxes in the importation of crude oil shall be based on the gross actual receipt without deducting the basic sediment and water (BSW). The full text of the memorandum 1 reads as follows:

The Collector of Customs

Port o

f Manila

Port of Batangas

Subport of Li-may, Bataan

Effective February 1, 1971, Customs duties and taxes on importation of crude oil shall be based on the gross actual receipts without deducting the BSW as has been previously done.

In determining the freight, the amount indicated in the bill of lading or as certi -fied by the ship agent shall be used as basis. However, if it is found by the ex-aminer that the actual receipt is more than the manifested weight, the freight shall be adjusted accordingly.

Please see to it that all the personnel concerned in your respective ports are in-formed of these instructions.

(SG

D.) ROLANDO A. GEOTINA

Acting Commissioner of Cus-toms

The assessments were timely protested by Caltex before the Collector of Customs on June 9, 1982, July 21, 1982 and September 8, 1982, 2 respectively, on the ground that the BSW contents should have been deducted before imposing the assessable ad valorem duties. The protests were, however, disregarded in a decision dated December 19, 1983.

Caltex then elevated the case to the Commissioner of Customs, who affirmed the Collector's find-ing in a decision dated October 23, 1984, disposing as follows:

WHEREFORE, finding no cogent reason to disturb the decision of the Collec-tor of Customs, Port of Batangas, the same is hereby affirmed.

SO ORDERED.

Undaunted, Caltex filed a petition for review with the Court of Tax Appeals (CTA) raising the same argument. On August 9, 1991, 3 the CTA ruled in favor of Caltex and reversed the decisions of both the Collector of Customs and Commissioner of Customs, the dispositive portion of the decision reads:

WHEREFORE, the petition is GRANTED. Respondent [Commissioner of Cus-toms] should and is hereby ordered to refund or credit to petitioner the follow-ing amounts: P212,959.00 under Entry No. 163/82; P759,385.00 under Entry No. 204/82; P532,732.00 under Entry No. 293/82. 4

Disagreeing with the CTA decision, the Commissioner of Customs filed a petition for review with the Court of Appeals questioning the decision. On February 12, 1992, the appellate court set aside the CTA's decision and reinstated the ruling of the Commissioner of Customs. 5 In reversing the CTA's decision, the Court of Appeals justified its ruling in this wise:

The ad valorem duties should thus be based on the price paid by the importer as shown in the sales invoice. In this case, apparently the sale invoices do not indi-cate a distinct and separate price or value for the crude oil alone without the ba-sic sediment and water contents or BSW. This is so because, as already stated, the BSW naturally occur in crude oil. In the case at bar, the BSW was only formed and produced during transit which should be considered an accession. Therefore, it should be included in the delivery of crude oil as part of what was actually purchased by the importer. (Civil Code, Art. 1166).

In computing the ad valorem duties on the basis of the sales invoice, (it be-comes irrelevant whether the volume of crude oil increased while in transit by reason of BSW and other impurities, because the law mandates that the tax should be based on the home consumption value which is the price indicated in the sales invoice or the value of the importation. (Commissioner of Customs v. Proctor & Gamble, 169 SCRA 693 [1989]; Commissioner of Customs v. Court of Tax Appeals, 162 SCRA 730 [1988]; Commissioner of Customs v. Court of Tax Appeals, supra). Even if BSW contents are deducted from the actual gross barrels received by respondent Caltex, the price in the sales invoice would re-main unaltered.

The decretal portion of the decision reads: 6

WHEREFORE, the decision appealed from is REVERSED and the decision of the Collector of Customs as affirmed by the Commissioner of Customs is RE-INSTATED.

Dismayed by the sudden turn of events, Caltex filed a motion for reconsideration which was, how-ever, denied by the Court of Appeals in a resolution dated March 19, 1992. 7 Hence, this petition.

The basic issue for resolution is whether the Basic Sediment and Water, as impurities, should have been deducted from the gross actual receipts to determine the proper imposable ad valorem duties.

Before discussing the crux of the petition, a preliminary matter to be threshed out is Caltex's asser-tion that the Collector of Customs should have published the memorandum which increases the im-posable duties for importation of oil, for in the absence of publication, the same would be violative of due process and Section 3502 8of the Tariff and Customs Code. 9 At this juncture, it is important

to note that the non-publication of the memorandum was not denied by the Commissioner of Cus-toms. 10

There is no doubt that issuances by an administrative agency have the force and effect of law. 11 Corollarily, when the issuances are of "general applicability," publication is necessary as a requirement of due process. 12 In this regard, Commonwealth Act No. 638, 13 mandates that be-sides legislations and resolutions of public nature of the Congress of the Philippines, executive and administrative orders and proclamations which have general applicability must also be published.

It cannot be disputed that the questioned memorandum increases the imposable duties for the im-portation of oil, a departure from the previous practice. To be sure, the increase invariably interferes with the property rights of oil importers. Hence, the statutory norm of publication is necessary, not only for effectivity, but also to apprise those affected. Since the assailed memorandum was never published, it follows the same cannot be upheld. 14

We, however, are not unmindful of the possible effect of this ruling upon our country's tax revenue, in light of the fact that the genesis of instant petition took place some 16 years ago. Likewise, we cannot close our eyes to the fact that the collections were done in reliance on the validity of the memorandum. Thus, we are constrained to adopt a practical and realistic solution for after all, cus-tom duties are taxes on import and export of goods, hence, it is the lifeblood of the nation.  15 Un-doubtedly, to accept Caltex's belated protestations will necessarily prejudice the public interest.

In Fernandez v. Cuerva, 16 which explained the effect of a declaration of invalidity of an assailed legislative or executive act, we declared:

The growing awareness of the role of the judiciary as the governmental organ which has the final say on whether or not a legislative or executive measure is valid leads to a more appreciative attitude of the emerging concept that a decla-ration of nullity may have legal consequences which the more orthodox view would deny. That for a period of time such a statute, treaty, executive order, or ordinance was in "actual existence" appears to be indisputable. What is more appropriate and logical then than to consider it as "an operative fact".

In addition to the preceding discussion, a more glaring act which must be emphasized is that the importations occurred in 1982 or eleven (11) years after said memorandum was issued, hence, Cal-tex cannot feign ignorance as to the existence of such memorandum. Certainly, it is safe to assume that Caltex, as a regular importer of crude oil, had knowledge that, from 1971 the procedure for de-termining the ad valorem duties on crude oil importation was that the BSW content were to be in-cluded in imposing the duties due. However, from 1971 to 1982, Caltex made no move to question the validity of the memorandum nor did it assail the duties being charged on its shipment before the proper forum. In fact, it would not be unwarranted to conclude that during this period, Caltex con-tinued importing crude oil under the procedures laid down by the Memorandum. To compound matters, Caltex offered no plausible explanation nor justifiable reason for its delay or omission in taking timely action against the memorandum which was already in existence for a period of nine years prior to the importations in question. The time-honored rule anchored on public policy is that relief will be denied to a litigant whose claim or demand has become "stale," or who has acquiesced in the prevailing situation for an unreasonable length of time, or who has not been vigilant or who has slept on his rights either by negligence, folly or inattention. 17 Caltex has no one to blame but itself.

With respect to the decisive issue posed by the instant petition, the axiomatic rule is that the du-tiable value of an imported article subject to ad valorem is based on its home consumption value or price as freely offered for sale in wholesale quantities in the ordinary course of trade in the princi-pal market of the country from where exported on the date of exportation to the Philippines. The

home consumption value is the price declared in the consular, commercial, trade or sales invoice. Thus, in the leading case of Commissioner of Customs v. Court of Tax Appeal,18 we held:

(t)he law is clear and mandatory. The dutiable value of an imported article sub-ject to an ad valorem rate of duty is based on its home consumption value or price as freely offered for sale in wholesale quantities in the ordinary course of trade in the principal markets of the country from where exported on the date of exportation to the Philippines. That home consumption value or price is the value or price declared in the consular, commercial, trade or sales invoice.

The above doctrine has consistently been applied by this Court in subsequent cases. 19

Consequently, Caltex, in an effort to prove that the BSW contents should have been omitted in the purchase price, submitted the sales invoices provided by its seller in Saudi Arabia 20 indicating a net barrel computation, that is, crude oil without BSW. 21 Paradoxically, the Import Entry permit declaration it submitted before the Collector of Customs showed otherwise, that is the BSW con-tents were not deducted in the purchase price. 22

Obviously, there is a discrepancy between the sales invoice and the Import Entry permit submitted by Caltex. Faced with this fact, we must uphold the latter as more conclusive. In the early case of Murphy, Morris & Co. v. Collector of Customs, 23 we held that in the absence of any compelling reason, sworn statements made before customs officials concerning an importation would render said declarations conclusive upon the party. Furthermore, under the Tariff and Customs Code, dec-larations and statements contained in the Import Entry Permit are presumed to be true and correct under the penalties of falsification and perjury. 24 Moreover, descriptions in entries and other docu-ments are admissions against interest and presumptively correct. 25

Our conclusion is premised on the fact that sales, commercial or consular invoices are not conclu-sive on the government. Our customs laws should not be at the mercy of importers who may avail of schemes and other arrangements to lower and reduce the face value of the articles covered by such invoices. 26 Noteworthy is the fact that: "If the customs authorities were bound by the invoice value, it is evident that they would be, to a considerable extent, at the mercy of foreign, merchants and importers. The purpose of Congress in providing for an appraiser was to prevent fraud upon the customs, and thus protect the revenues of the Government." 27

Conformably with the above discussion, a scrutiny of Caltex's Import En-try declaration covering the importation dated April 10, 1982, stated that it had paid a total purchase price of $53,055,905, broken down as follows:

TOTAL BARRELS (In-cluding BSW)

PRICE/BARREL TOTAL PRICE

Arabian Light/Medium 1,411,310 $32.964 $ 46,522,733

Arabian Heavy 210,537 $31.030 $ 6,533,131

$53,055,905

 

It is important to note that in arriving at the total purchase price, the barrels representing the BSW were included in the computation. In other words, the 1,765 barrels of BSW of Arabian light/medium mix crude oil, as well as the 1,852 barrels of BSW for Arabian heavy, were declared by Caltex as part of the total purchase price.

If Caltex wanted to prove that, at the outset, the BSW contents were to be excluded from the origi -nal purchase price, then it should have declared in the Import Entry permit that it had only paid for the Arabian Light/Medium crude oil the amount of $46,464,241, computed as follows:

Gross Barrels : 1,411,310

Less : 1,765 (BSW content)

Net Barrels : 1,409,545

Multiplied by : $ 32.964 per barrel

TOTAL : $ 46,464,241

On the other hand, with respect to the Arabian heavy crude oil, Caltex should have paid the amount of $6,475,624, computed as follows:

Gross Barrels : 210,537

Less : 1,852 (BSW content)

Net Barrels : 208,685

Multiplied by : $ 31.030 per barrel

TOTAL : $ 6,475,624

The importation dated June 7, 1982, as reflected in the Import Entry permit, would reveal that Cal-tex paid $55,554,053 for Arabian light/medium crude oil and $8,835,300 for Arabian light crude oil. The respective BSW contents of both importations were included for the purpose of determin-ing the total purchase price. 28 Likewise, for the importation dated July 19, 1982, the basis of the purchase price paid by petitioner was without any deductions representing the BSW contents. 29

Considering the foregoing, the Collector of Customs did not err in imposing a 20% ad valorem duty on Caltex's importations on the basis of the purchase price in the Import Entry permit instead of the sales invoices.

Caltex, however, insists that BSW contents, being impurities, are not subject to ad valorem taxes. 30 To support its contention, Caltex argues that:

. . ., the BSW is destined to be thrown away as they are in fact thrown away (TSN, April 14, 1986, pp. 21 and 22 at the CTA). To petitioner, the thing of value is the crude oil while BSW has no value whatsoever. Thus, when it is con-sidered that the rate of duty is based according to value (ad valorem as con-trasted to "specific" which is imposed as a fixed sum on each article of a class without regard to value (Black's Law Dictionary, Fifth Edition), such a duty cannot attach to BSW, BSW having no value at all.

It is important to emphasize that Caltex in contending that the BSW, as impurities, should be de-ducted from the purchase price, has the burden of proof to establish the validity of the claimed de -duction. 31 A party challenging an appraiser's finding of value is required to prove not only that the appraised value is erroneous but also what the proper value is. 32

Evidently, the issue to be resolved is whether BSW contents are impurities usually found in crude oil. The resolution of this query is important since under customs law no deductions are permitted for impurities except those not usually found in or upon such similar merchandice. 33

Caltex asserts that these impurities are not an integral part of crude oil. This position was sustained by the Court of Tax Appeals, thus:

It is clarified under Rule 3(b) that the application of Section 203 is premised on the condition that before articles can be classified as forming part of the essen-tial article, the other article should be a "composite" part or "component" of the essential article. This is clear from the phrase "Mixture and composite arti-cles which consist of different materials or are made of different components." It appears that basic sediment and water are not "components" or "composites" of crude oil. 34

In reversing the above finding, the Court of Appeals ruled that BSW naturally occurs in crude oil, especially during transit, hence:

Thus, even the value of coverings and packing materials, which when destroyed upon opening after arrival of the shipment has no value except perhaps as scrap, is included in determining the home consumption value. There is no reason then why the BSW elements, which naturally occur in oil, should be deducted from the gross receipt. 35

We sustain the observation of the Court of Appeals.

The principal physical composition of oil are carbon and hydrogen. 36 However, this is not to de-tract from the fact that other fundamental substances are properties of crude oil. One of this sub -stance is water. As one authority observes:

The presence of water in the rocks is a controlling factor in the accumulation of oil and gas. Its effect in driving these substances from the finer to the coarser pores in the rock has been noticed. 37

Another substance is sand.

Although most of the oil produced in the Salt Creek field, Wyo., comes from sands, some oil has been produced in commercial quantities from crevices in the shale strata that lie above the First Wall Creek sand. Oil is also produced from fissured shale in a few fields in California, at Florence, Colo., and in sev-eral small fields in Pennsylvania. 38

As can be gleaned from the foregoing, there seems to be no dispute that BSW, as impurities, are part of crude oil. In fact, we agree with the observation of the Court of Appeals that these impurities could have been formed during the trip from Saudi Arabia to the Philippines.

Because of the paucity of local precedents squarely in point, we find occasion here to state the rule as enunciated by the United States CustomsCourt 39 that prohibited the deduction for "dirt" or "impurities" other than those not usually found in or upon the goods, thus:

Appellant conceded that no application for allowance was made under customs regulations. Such application must be made within 10 days after the return of the weight by customs officials, and compliance is mandatory as a condition precedent to recovery. The judgment of the Customs Court sustaining Collec-tor's rejection of the protest claim was properly rendered in accordance with es-tablished law. Appellant failed to establish that the dirt and other impurities in

the feathers were of an unusual quantity deemed to be excessive in crude im-ported feathers.

Consequently, the Court of Appeals did not err in concluding BSW as an integral part of crude oil, which must be included in the computation of the assessable duties.

Finally, Caltex avers that it failed to receive a copy of the Commissioner of Customs petition within the 15-day period to file a petition for review. Hence, the Court of Appeals erred in not dismissing the petition outright as provided for in Circular No. 1-91 in relation to Circular No. 28-91.

Circular No. 1-91 issued on February 27, 1991 and pertinently provides:

xxx xxx xxx

5. HOW APPEAL TAKEN. — Appeal shall be taken by filing a verified peti-tion for review in six (6) legible copies, with the Court of Appeals, a copy of which shall be served on the adverse party and on the court or agency a quo. Proof of service of the petition on the adverse party and on the court of agency a quo shall be attached to the petition.

While Circular 28-91 reads as follows:

A petition filed under Rule 45, or under Rule 65, or a motion for extension may be denied outright if it is not clearly legible, or there is no proof of service on the lower court, tribunal, or office concerned and on tile adverse party in ac-cordance with Section 3, 5 and 10 of Rule 13, attached to the petition or motion for extension when filed. (Emphasis supplied).

Reviewing the records of the case, while it seems that the petition for  certiorari was indeed not served upon Caltex within the 15-day reglementary period, the same was, however, furnished the very next day. Hence, the proximity of the service of petition for review to Caltex may be pleaded as substantial compliance therewith. Our pronouncement is not without any precedent. In Gabionza v. Court of Appeals, 40 we explicitly stated:

It is scarcely necessary to add that Circular No. 28-91 must be so interpreted and applied as to achieve the purposes projected by the Supreme Court when it promulgated that Circular. Circular No. 28-91 was designed to serve as an in-strument to promote and facilitate an orderly administration of justice and should not be interpreted with such absolute literalness as to subvert its own ul -timate and legitimate objective or the goal of all rules of procedure — which is to achieve substantial justice as expeditiously as possible.

The fact that the Circular requires that it be strictly complied with merely un-derscored its mandatory nature in that it cannot be dispensed with or its require-ments altogether disregarded, but it does not thereby interdict substantial com-pliance with its provisions under justifiable circumstances.

WHEREFORE, in view of the foregoing, the instant petition is DISMISSED and the appealed deci-sion of the Court of Appeals dated February 12, 1992, is AFFIRMED. No costs.

SO ORDERED.

Narvasa, C.J., Kapunan and Purisima, JJ., concur.

G.R. No. 113236            March 5, 2001

FIRESTONE TIRE & RUBBER COMPANY OF THE PHILIPPINES, petitioner, vs.COURT OF APPEALS and LUZON DEVELOPMENT BANK, respondents.

QUISUMBING, J.:

This petition assails the decision 1 dated December 29, 1993 of the Court of Appeals in CA-G.R. CV No. 29546, which affirmed the judgment 2 of the Regional Trial Court of Pasay City, Branch 113 in Civil Case No. PQ-7854-P, dismissing Firestone's complaint for damages.

The facts of this case, adopted by the CA and based on findings by the trial court, are as follows:

. . . [D]efendant is a banking corporation. It operates under a certificate of authority is-sued by the Central Bank of the Philippines, and among its activities, accepts savings and time deposits. Said defendant had as one of its client-depositors the Fojas-Arca Enter -prises Company ("Fojas-Arca" for brevity). Fojas-Arca maintaining a special savings ac-count with the defendant, the latter authorized and allowed withdrawals of funds there-from through the medium of special withdrawal slips. These are supplied by the defen-dant to Fojas-Arca.

In January 1978, plaintiff and Fojas-Arca entered into a "Franchised Dealership Agree-ment" (Exh. B) whereby Fojas-Arca has the privilege to purchase on credit and sell plain-tiff's products.

On January 14, 1978 up to May 15, 1978. Pursuant to the aforesaid Agreement, Fojas-Arca purchased on credit Firestone products from plaintiff with a total amount of P4,896,000.00. In payment of these purchases, Fojas-Arca delivered to plaintiff six (6) special withdrawal slips drawn upon the defendant. In turn, these were deposited by the plaintiff with its current account with the Citibank. All of them were honored and paid by the defendant. This singular circumstance made plaintiff believe [sic] and relied [sic] on the fact that the succeeding special withdrawal slips drawn upon the defendant would be equally sufficiently funded. Relying on such confidence and belief and as a direct conse-quence thereof, plaintiff extended to Fojas-Arca other purchases on credit of its products.

On the following dates Fojas-Arca purchased Firestone products on credit (Exh. M, I, J, K) and delivered to plaintiff the corresponding special withdrawal slips in payment thereof drawn upon the defen-dant, to wit:

DATEWITHDRAWAL SLIP NO.

AMOUNT

June 15, 1978 42127 P1,198,092.80

July 15, 1978 42128 940,190.00

Aug. 15, 1978 42129 880,000.00

Sep. 15, 1978 42130 981,500.00

These were likewise deposited by plaintiff in its current account with Citibank and in turn the Citibank forwarded it [sic] to the defendant for payment and collection, as it had done in respect of the previous special withdrawal slips. Out of these four (4) withdrawal slips only withdrawal slip No. 42130 in the amount of P981,500.00 was honored and paid by the defendant in October 1978. Because of the absence for a long period coupled with the fact that defendant honored and paid withdrawal slips No. 42128 dated July 15, 1978, in the amount of P981,500.00 plaintiff's belief was all the more strengthened that the other withdrawal slips were likewise sufficiently funded, and that it had received full value and payment of Fojas-Arca's credit purchased then outstanding at the time. On this basis, plaintiff was induced to continue extending to Fojas-Arca further purchase on credit of its products as per agreement (Exh. "B").

However, on December 14, 1978, plaintiff was informed by Citibank that special with-drawal slips No. 42127 dated June 15, 1978 for P1,198,092.80 and No. 42129 dated Au-gust 15, 1978 for P880,000.00 were dishonored and not paid for the reason 'NO AR-RANGEMENT.' As a consequence, the Citibank debited plaintiff's account for the total sum of P2,078,092.80 representing the aggregate amount of the above-two special with-drawal slips. Under such situation, plaintiff averred that the pecuniary losses it suffered is caused by and directly attributable to defendant's gross negligence.

On September 25, 1979, counsel of plaintiff served a written demand upon the defendant for the satisfaction of the damages suffered by it. And due to defendant's refusal to pay plaintiff's claim, plaintiff has been constrained to file this complaint, thereby compelling plaintiff to incur litigation expenses and attorney's fees which amount are recoverable from the defendant.

Controverting the foregoing asseverations of plaintiff, defendant asserted, inter alia that the transactions mentioned by plaintiff are that of plaintiff and Fojas-Arca only, [in] which defendant is not involved; Vehemently, it was denied by defendant that the special withdrawal slips were honored and treated as if it were checks, the truth being that when the special withdrawal slips were received by defendant, it only verified whether or not the signatures therein were authentic, and whether or not the deposit level in the passbook concurred with the savings ledger, and whether or not the deposit is sufficient to cover the withdrawal; if plaintiff treated the special withdrawal slips paid by Fojas-Arca as checks then plaintiff has to blame itself for being grossly negligent in treating the withdrawal slips as check when it is clearly stated therein that the withdrawal slips are non-nego-tiable; that defendant is not a privy to any of the transactions between Fojas-Arca and plaintiff for which reason defendant is not duty bound to notify nor give notice of any-thing to plaintiff. If at first defendant had given notice to plaintiff it is merely an exten -sion of usual bank courtesy to a prospective client; that defendant is only dealing with its depositor Fojas-Arca and not the plaintiff. In summation, defendant categorically stated that plaintiff has no cause of action against it (pp. 1-3, Dec.; pp. 368-370, id).3

Petitioner's complaint4 for a sum of money and damages with the Regional Trial Court of Pasay City, Branch 113, docketed as Civil Case No. 29546, was dismissed together with the counterclaim of defendant.

Petitioner appealed the decision to the Court of Appeals. It averred that respondent Luzon Develop-ment Bank was liable for damages under Article 21765 in relation to Articles 196 and 207 of the Civil Code. As noted by the CA, petitioner alleged the following tortious acts on the part of private respondent: 1) the acceptance and payment of the special withdrawal slips without the presentation of the depositor's passbook thereby giving the impression that the withdrawal slips are instruments payable upon presentment; 2) giving the special withdrawal slips the general appearance of checks;

and 3) the failure of respondent bank to seasonably warn petitioner that it would not honor two of the four special withdrawal slips.

On December 29, 1993, the Court of Appeals promulgated its assailed decision. It denied the appeal and affirmed the judgment of the trial court. According to the appellate court, respondent bank noti-fied the depositor to present the passbook whenever it received a collection note from another bank, belying petitioner's claim that respondent bank was negligent in not requiring a passbook under the subject transaction. The appellate court also found that the special withdrawal slips in question were not purposely given the appearance of checks, contrary to petitioner's assertions, and thus should not have been mistaken for checks. Lastly, the appellate court ruled that the respondent bank was under no obligation to inform petitioner of the dishonor of the special withdrawal slips, for to do so would have been a violation of the law on the secrecy of bank deposits.

Hence, the instant petition, alleging the following assignment of error:

25. The CA grievously erred in holding that the [Luzon Development] Bank was free from any fault or negligence regarding the dishonor, or in failing to give fair and timely advice of the dishonor, of the twointermediate LDB Slips and in failing to award damages to Firestone pursuant to Article 2176 of the New Civil Code.8

The issue for our consideration is whether or not respondent bank should be held liable for damages suffered by petitioner, due to its allegedly belated notice of non-payment of the subject withdrawal slips.

The initial transaction in this case was between petitioner and Fojas-Arca, whereby the latter pur-chased tires from the former with special withdrawal slips drawn upon Fojas-Arca's special savings account with respondent bank. Petitioner in turn deposited these withdrawal slips with Citibank. The latter credited the same to petitioner's current account, then presented the slips for payment to respondent bank. It was at this point that the bone of contention arose.

On December 14, 1978, Citibank informed petitioner that special withdrawal slips Nos. 42127 and 42129 dated June 15, 1978 and August 15, 1978, respectively, were refused payment by respondent bank due to insufficiency of Fojas-Arca's funds on deposit. That information came about six months from the time Fojas-Arca purchased tires from petitioner using the subject withdrawal slips. Citibank then debited the amount of these withdrawal slips from petitioner's account, causing the alleged pecuniary damage subject of petitioner's cause of action.

At the outset, we note that petitioner admits that the withdrawal slips in question were non-nego-tiable.9 Hence, the rules governing the giving of immediate notice of dishonor of negotiable instru-ments do not apply in this case.10Petitioner itself concedes this point.11 Thus, respondent bank was under no obligation to give immediate notice that it would not make payment on the subject with-drawal slips. Citibank should have known that withdrawal slips were not negotiable instruments. It could not expect these slips to be treated as checks by other entities. Payment or notice of dishonor from respondent bank could not be expected immediately, in contrast to the situation involving checks.

In the case at bar, it appears that Citibank, with the knowledge that respondent Luzon Development Bank, had honored and paid the previous withdrawal slips, automatically credited petitioner's cur-rent account with the amount of the subject withdrawal slips, then merely waited for the same to be honored and paid by respondent bank. It presumed that the withdrawal slips were "good."

It bears stressing that Citibank could not have missed the non-negotiable nature of the withdrawal slips. The essence of negotiability which characterizes a negotiable paper as a credit instrument lies in its freedom to circulate freely as a substitute for money.12 The withdrawal slips in question lacked this character.

A bank is under obligation to treat the accounts of its depositors with meticulous care, whether such account consists only of a few hundred pesos or of millions of pesos.13 The fact that the other withdrawal slips were honored and paid by respondent bank was no license for Citibank to presume that subsequent slips would be honored and paid immediately. By doing so, it failed in its fiduciary duty to treat the accounts of its clients with the highest degree of care.14

In the ordinary and usual course of banking operations, current account deposits are accepted by the bank on the basis of deposit slips prepared and signed by the depositor, or the latter's agent or repre-sentative, who indicates therein the current account number to which the deposit is to be credited, the name of the depositor or current account holder, the date of the deposit, and the amount of the deposit either in cash or in check.15

The withdrawal slips deposited with petitioner's current account with Citibank were not checks, as petitioner admits. Citibank was not bound to accept the withdrawal slips as a valid mode of deposit. But having erroneously accepted them as such, Citibank — and petitioner as account-holder — must bear the risks attendant to the acceptance of these instruments. Petitioner and Citibank could not now shift the risk and hold private respondent liable for their admitted mistake.

WHEREFORE, the petition is DENIED and the decision of the Court of Appeals in CA-G.R. CV No. 29546 is AFFIRMED. Costs against petitioner.

SO ORDERED.

G.R. No. 89252 May 24, 1993

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

Salva, Villanueva & Associates for Delta Motors Corporation.

Reyes, Salazar & Associates for Pilipinas Bank.

 

FELICIANO, J.:

On 9 February 1981, petitioner Raul 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 peti-tioner'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. How-ever, 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 re -spondent Pilipinas Bank ("Pilipinas"). It reads as follows:

PILIPINAS BANKMakati Stock Exchange Bldg.,Ayala Avenue, Makati,Metro Manila

February 9, 1981———————

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 PHILIP-PINE 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 au-thorized 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.

PILIP

INAS BANK(By Elizabeth De VillaIllegi-ble 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 Philfi -nance 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 Phil-finance. 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 par-tial 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 Se -curities 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 li-able for the travails of plaintiff-appellant, it is Philfinance. As correctly ob-served by the trial court:

This act of Philfinance in accepting the investment of plain-tiff and charging it against DMC PN No. 2731 when its en-tire 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. Unfortu-nately for plaintiff, Philfinance was not impleaded as one of the defendants in this case at bar; hence, this Court is with-out 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 re-solved to give due course to the petition and required the parties to file their respective memo -randa. 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 pri-vate respondent Delta his assigned portion of DMC PN No. 2731; (ii) in failing to hold private re-spondent 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 Silve-rio, Sr. 8

There are at least two (2) sets of relationships which we need to address: firstly, the relationship of petitioner vis-a-visDelta; 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 neces-sarily 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 peti-tioner, 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 In-struments 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 distin-guished from theassignment or transfer of an instrument whether that be negotiable or non-nego-tiable. 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 ne-gotiated, 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 prohibi -tion 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-trans-ferable" or "non-assignable." It contained no stipulation which prohibited Philfinance from assign-ing 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. Al-fredo 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 Trul

y Yours,

(Sgd.)Florencio B. Bi-aganSenior Vice Pres-i-dent 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 conclu -sion on this point is reinforced by the fact that what Philfinance and Delta were doing by their ex-change 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, Philfi -nance was left with not P4,600,000.00 but only P600,000.00 in cash and the two (2) Delta promis-sory 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 va-lidity and enforceability of the assignment in favor of petitioner. 14 Delta's argument that Philfi-nance's sale or assignment of part of its rights to DMC PN No. 2731 constituted conventional sub -rogation, 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 deal-ing 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 securi-ties."

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 prac-tice, 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 in-stitution 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 ad-equate 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 consum-able, 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 sup-plied)

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 [Philfi-nance] 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. Fur-ther, 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 as-signed to him.

The record shows, however, that petitioner notified Delta of the fact of the assignment to him only on 14 July 1981, 19that is, after the maturity not only of the money market placement made by peti-tioner but also of both DMC PN No. 2731 and Philfinance PN No. 143-A. In other words,  peti-tioner 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 com-pensation 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 con-sent thereto, the latter may set up the compensation of debts previous to the ces-sion, 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 assign-ment, pays his creditor shall be released from the obligation." In Sison v. Yap-Tico, 21 the Court ex-plained that:

[n]o man is bound to remain a debtor; he may pay to him with whom he con-tacted 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 as-signee of Philfinance, is similarly disabled from collecting from Delta the portion of the Note as -signed to him.

It bears some emphasis that petitioner could have notified Delta of the assignment or sale was ef -fected 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, com-pensation 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. Be-cause 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 de-fense 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 con-tends 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 Phil-finance; 24

(3) petitioner may inspect the Note either "personally or by authorized represen-tative", 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 outstand-ing 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 con-verting 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 be-fore the trial court, petitioner referred merely to the obligation of private respondent Pilipinas to ef -fect 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 assump-tion 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 na-ture of the custodianship assumed by private respondent Pilipinas necessarily implies solidary lia-bility 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 delib -eration, 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 desig -nating Pilipinas as custodian or depositary bank. The depositor was initially Philfinance; the obliga-tion of the depository was owed, however, to petitioner Sesbreño as beneficiary of the custodian-ship 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 deposi -tary 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 de-positor (or, in the presented case, of the beneficiary) of the contract, even though a term for such re -turn 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 generat-ing 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 there-fore, 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 in-structions of Philfinance, in obvious contravention of its undertaking under the DCR to effect phys-ical delivery of the Note upon receipt of "written instructions" from petitioner Sesbreño. The osten-sible 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 deliv-ery 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 de-positor-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 un-lawful 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 as-signed to petitioner but lost by him by reason of discharge of the Note by compensation, plus legal interest of six percent (6%) per annum containing from 14 March 1981.

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

III.

The third principal contention of petitioner — that Philfinance and private respondents Delta and Pilipinas should be treated as one corporate entity — need not detain us for long.

In the first place, as already noted, jurisdiction over the person of Philfinance was never acquired either by the trial court nor by the respondent Court of Appeals. Petitioner similarly did not seek to implead Philfinance in the Petition before us.

Secondly, it is not disputed that Philfinance and private respondents Delta and Pilipinas have been organized as separate corporate entities. Petitioner asks us to pierce their separate corporate entities, but has been able only to cite the presence of a common Director — Mr. Ricardo Silverio, Sr., sit-ting 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  al-ter 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 undeter-mined 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 com-plaint against Pilipinas Bank. Private respondent Pilipinas bank is hereby ORDERED to indemnify petitioner for damages in the amount of P304,533.33, plus legal interest thereon at the rate of six percent (6%) per annum counted from 2 April 1981. As so modified, the Decision and Resolution of the Court of Appeals are hereby AFFIRMED. No pronouncement as to costs.

SO ORDERED.

G.R. No. L-15126           November 30, 1961

VICENTE R. DE OCAMPO & CO., plaintiff-appellee, vs.ANITA GATCHALIAN, ET AL., defendants-appellants.

Vicente Formoso, Jr. for plaintiff-appellee.Reyes and Pangalañgan for defendants-appellants.

LABRADOR, J.:

Appeal from a judgment of the Court of First Instance of Manila, Hon. Conrado M. Velasquez, pre -siding, sentencing the defendants to pay the plaintiff the sum of P600, with legal interest from Sep-tember 10, 1953 until paid, and to pay the costs.

The action is for the recovery of the value of a check for P600 payable to the plaintiff and drawn by defendant Anita C. Gatchalian. The complaint sets forth the check and alleges that plaintiff received it in payment of the indebtedness of one Matilde Gonzales; that upon receipt of said check, plaintiff gave Matilde Gonzales P158.25, the difference between the face value of the check and Matilde Gonzales' indebtedness. The defendants admit the execution of the check but they allege in their an-swer, as affirmative defense, that it was issued subject to a condition, which was not fulfilled, and that plaintiff was guilty of gross negligence in not taking steps to protect itself.

At the time of the trial, the parties submitted a stipulation of facts, which reads as follows:

Plaintiff and defendants through their respective undersigned attorney's respectfully sub-mit the following Agreed Stipulation of Facts;

First. — That on or about 8 September 1953, in the evening, defendant Anita C. Gatchalian who was then interested in looking for a car for the use of her husband and the family, was shown and offered a car by Manuel Gonzales who was accompanied by Emil Fajardo, the latter being personally known to defendant Anita C. Gatchalian;

Second. — That Manuel Gonzales represented to defend Anita C. Gatchalian that he was duly authorized by the owner of the car, Ocampo Clinic, to look for a buyer of said car and to negotiate for and accomplish said sale, but which facts were not known to plaintiff;

Third. — That defendant Anita C. Gatchalian, finding the price of the car quoted by Manuel Gonzales to her satisfaction, requested Manuel Gonzales to bring the car the day following together with the certificate of registration of the car, so that her husband would be able to see same; that on this request of defendant Anita C. Gatchalian, Manuel Gonza-les advised her that the owner of the car will not be willing to give the certificate of regis-tration unless there is a showing that the party interested in the purchase of said car is

ready and willing to make such purchase and that for this purpose Manuel Gonzales re-quested defendant Anita C. Gatchalian to give him (Manuel Gonzales) a check which will be shown to the owner as evidence of buyer's good faith in the intention to purchase the said car, the said check to be for safekeeping only of Manuel Gonzales and to be returned to defendant Anita C. Gatchalian the following day when Manuel Gonzales brings the car and the certificate of registration, but which facts were not known to plaintiff;

Fourth. — That relying on these representations of Manuel Gonzales and with his assur-ance that said check will be only for safekeeping and which will be returned to said de-fendant the following day when the car and its certificate of registration will be brought by Manuel Gonzales to defendants, but which facts were not known to plaintiff, defen-dant Anita C. Gatchalian drew and issued a check, Exh. "B"; that Manuel Gonzales exe-cuted and issued a receipt for said check, Exh. "1";

Fifth. — That on the failure of Manuel Gonzales to appear the day following and on his failure to bring the car and its certificate of registration and to return the check, Exh. "B", on the following day as previously agreed upon, defendant Anita C. Gatchalian issued a "Stop Payment Order" on the check, Exh. "3", with the drawee bank. Said "Stop Payment Order" was issued without previous notice on plaintiff not being know to defendant, Anita C. Gatchalian and who furthermore had no reason to know check was given to plaintiff;

Sixth. — That defendants, both or either of them, did not know personally Manuel Gonza-les or any member of his family at any time prior to September 1953, but that defendant Hipolito Gatchalian is personally acquainted with V. R. de Ocampo;

Seventh. — That defendants, both or either of them, had no arrangements or agreement with the Ocampo Clinic at any time prior to, on or after 9 September 1953 for the hospi-talization of the wife of Manuel Gonzales and neither or both of said defendants had as-sumed, expressly or impliedly, with the Ocampo Clinic, the obligation of Manuel Gonza-les or his wife for the hospitalization of the latter;

Eight. — That defendants, both or either of them, had no obligation or liability, directly or indirectly with the Ocampo Clinic before, or on 9 September 1953;

Ninth. — That Manuel Gonzales having received the check Exh. "B" from defendant Anita C. Gatchalian under the representations and conditions herein above specified, de-livered the same to the Ocampo Clinic, in payment of the fees and expenses arising from the hospitalization of his wife;

Tenth. — That plaintiff for and in consideration of fees and expenses of hospitalization and the release of the wife of Manuel Gonzales from its hospital, accepted said check, ap-plying P441.75 (Exhibit "A") thereof to payment of said fees and expenses and delivering to Manuel Gonzales the amount of P158.25 (as per receipt, Exhibit "D") representing the balance on the amount of the said check, Exh. "B";

Eleventh. — That the acts of acceptance of the check and application of its proceeds in the manner specified above were made without previous inquiry by plaintiff from defen-dants:

Twelfth. — That plaintiff filed or caused to be filed with the Office of the City Fiscal of Manila, a complaint for estafa against Manuel Gonzales based on and arising from the acts of said Manuel Gonzales in paying his obligations with plaintiff and receiving the cash balance of the check, Exh. "B" and that said complaint was subsequently dropped;

Thirteenth. — That the exhibits mentioned in this stipulation and the other exhibits sub-mitted previously, be considered as parts of this stipulation, without necessity of formally offering them in evidence;

WHEREFORE, it is most respectfully prayed that this agreed stipulation of facts be ad-mitted and that the parties hereto be given fifteen days from today within which to submit simultaneously their memorandum to discuss the issues of law arising from the facts, re-serving to either party the right to submit reply memorandum, if necessary, within ten days from receipt of their main memoranda. (pp. 21-25, Defendant's Record on Appeal).

No other evidence was submitted and upon said stipulation the court rendered the judgment already alluded above.

In their appeal defendants-appellants contend that the check is not a negotiable instrument, under the facts and circumstances stated in the stipulation of facts, and that plaintiff is not a holder in due course. In support of the first contention, it is argued that defendant Gatchalian had no intention to transfer her property in the instrument as it was for safekeeping merely and, therefore, there was no delivery required by law (Section 16, Negotiable Instruments Law); that assuming for the sake of argument that delivery was not for safekeeping merely, delivery was conditional and the condition was not fulfilled.

In support of the contention that plaintiff-appellee is not a holder in due course, the appellant argues that plaintiff-appellee cannot be a holder in due course because there was no negotiation prior to plaintiff-appellee's acquiring the possession of the check; that a holder in due course presupposes a prior party from whose hands negotiation proceeded, and in the case at bar, plaintiff-appellee is the payee, the maker and the payee being original parties. It is also claimed that the plaintiff-appellee is not a holder in due course because it acquired the check with notice of defect in the title of the holder, Manuel Gonzales, and because under the circumstances stated in the stipulation of facts there were circumstances that brought suspicion about Gonzales' possession and negotiation, which circumstances should have placed the plaintiff-appellee under the duty, to inquire into the title of the holder. The circumstances are as follows:

The check is not a personal check of Manuel Gonzales. (Paragraph Ninth, Stipulation of Facts). Plaintiff could have inquired why a person would use the check of another to pay his own debt. Furthermore, plaintiff had the "means of knowledge" inasmuch as defen-dant Hipolito Gatchalian is personally acquainted with V. R. de Ocampo (Paragraph Sixth, Stipulation of Facts.).

The maker Anita C. Gatchalian is a complete stranger to Manuel Gonzales and Dr. V. R. de Ocampo (Paragraph Sixth, Stipulation of Facts).

The maker is not in any manner obligated to Ocampo Clinic nor to Manuel Gonzales. (Par. 7, Stipulation of Facts.)

The check could not have been intended to pay the hospital fees which amounted only to P441.75. The check is in the amount of P600.00, which is in excess of the amount due plaintiff. (Par. 10, Stipulation of Facts).

It was necessary for plaintiff to give Manuel Gonzales change in the sum P158.25 (Par. 10, Stipulation of Facts). Since Manuel Gonzales is the party obliged to pay, plaintiff should have been more cautious and wary in accepting a piece of paper and disbursing cold cash.

The check is payable to bearer. Hence, any person who holds it should have been sub-jected to inquiries. EVEN IN A BANK, CHECKS ARE NOT CASHED WITHOUT IN-

QUIRY FROM THE BEARER. The same inquiries should have been made by plaintiff. (Defendants-appellants' brief, pp. 52-53)

Answering the first contention of appellant, counsel for plaintiff-appellee argues that in accordance with the best authority on the Negotiable Instruments Law, plaintiff-appellee may be considered as a holder in due course, citing Brannan's Negotiable Instruments Law, 6th edition, page 252. On this issue Brannan holds that a payee may be a holder in due course and says that to this effect is the greater weight of authority, thus:

Whether the payee may be a holder in due course under the N. I. L., as he was at common law, is a question upon which the courts are in serious conflict. There can be no doubt that a proper interpretation of the act read as a whole leads to the conclusion that a payee may be a holder in due course under any circumstance in which he meets the requirements of Sec. 52.

The argument of Professor Brannan in an earlier edition of this work has never been suc-cessfully answered and is here repeated.

Section 191 defines "holder" as the payee or indorsee of a bill or note, who is in posses -sion of it, or the bearer thereof. Sec. 52 defendants defines a holder in due course as "a holder who has taken the instrument under the following conditions: 1. That it is complete and regular on its face. 2. That he became the holder of it before it was overdue, and with-out notice that it had been previously dishonored, if such was the fact. 3. That he took it in good faith and for value. 4. 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."

Since "holder", as defined in sec. 191, includes a payee who is in possession the word holder in the first clause of sec. 52 and in the second subsection may be replaced by the definition in sec. 191 so as to read "a holder in due course is a payee or indorsee who is in possession," etc. (Brannan's on Negotiable Instruments Law, 6th ed., p. 543).

The first argument of the defendants-appellants, therefore, depends upon whether or not the plain-tiff-appellee is a holder in due course. If it is such a holder in due course, it is immaterial that it was the payee and an immediate party to the instrument.

The other contention of the plaintiff is that there has been no negotiation of the instrument, because the drawer did not deliver the instrument to Manuel Gonzales with the intention of negotiating the same, or for the purpose of giving effect thereto, for as the stipulation of facts declares the check was to remain in the possession Manuel Gonzales, and was not to be negotiated, but was to serve merely as evidence of good faith of defendants in their desire to purchase the car being sold to them. Admitting that such was the intention of the drawer of the check when she delivered it to Manuel Gonzales, it was no fault of the plaintiff-appellee drawee if Manuel Gonzales delivered the check or negotiated it. As the check was payable to the plaintiff-appellee, and was entrusted to Manuel Gonzales by Gatchalian, the delivery to Manuel Gonzales was a delivery by the drawer to his own agent; in other words, Manuel Gonzales was the agent of the drawer Anita Gatchalian inso-far as the possession of the check is concerned. So, when the agent of drawer Manuel Gonzales ne-gotiated the check with the intention of getting its value from plaintiff-appellee, negotiation took place through no fault of the plaintiff-appellee, unless it can be shown that the plaintiff-appellee should be considered as having notice of the defect in the possession of the holder Manuel Gonza -les. Our resolution of this issue leads us to a consideration of the last question presented by the ap-pellants, i.e., whether the plaintiff-appellee may be considered as a holder in due course.

Section 52, Negotiable Instruments Law, defines holder in due course, thus:

A holder in due course is a holder who has taken the instrument under the following con-ditions:

(a) That it is complete and regular upon its face;

(b) That he became the holder of it before it was overdue, and without notice that it had been previously dishonored, if such was the fact;

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

(d) That at the time it was negotiated to him he had no notice of any infirmity in the in -strument or defect in the title of the person negotiating it.

The stipulation of facts expressly states that plaintiff-appellee was not aware of the circumstances under which the check was delivered to Manuel Gonzales, but we agree with the defendants-appel-lants that the circumstances indicated by them in their briefs, such as the fact that appellants had no obligation or liability to the Ocampo Clinic; that the amount of the check did not correspond ex-actly with the obligation of Matilde Gonzales to Dr. V. R. de Ocampo; and that the check had two parallel lines in the upper left hand corner, which practice means that the check could only be de -posited but may not be converted into cash — all these circumstances should have put the plaintiff-appellee to inquiry as to the why and wherefore of the possession of the check by Manuel Gonza-les, and why he used it to pay Matilde's account. It was payee's duty to ascertain from the holder Manuel Gonzales what the nature of the latter's title to the check was or the nature of his posses-sion. Having failed in this respect, we must declare that plaintiff-appellee was guilty of gross ne-glect in not finding out the nature of the title and possession of Manuel Gonzales, amounting to le-gal absence of good faith, and it may not be considered as a holder of the check in good faith. To such effect is the consensus of authority.

In order to show that the defendant had "knowledge of such facts that his action in taking the instrument amounted to bad faith," it is not necessary to prove that the defendant knew the exact fraud that was practiced upon the plaintiff by the defendant's assignor, it being sufficient to show that the defendant had notice that there was something wrong about his assignor's acquisition of title, although he did not have notice of the particular wrong that was committed. Paika v. Perry, 225 Mass. 563, 114 N.E. 830.

It is sufficient that the buyer of a note had notice or knowledge that the note was in some way tainted with fraud. It is not necessary that he should know the particulars or even the nature of the fraud, since all that is required is knowledge of such facts that his action in taking the note amounted bad faith. Ozark Motor Co. v. Horton (Mo. App.), 196 S.W. 395. Accord. Davis v. First Nat. Bank, 26 Ariz. 621, 229 Pac. 391.

Liberty bonds stolen from the plaintiff were brought by the thief, a boy fifteen years old, less than five feet tall, immature in appearance and bearing on his face the stamp a degen-erate, to the defendants' clerk for sale. The boy stated that they belonged to his mother. The defendants paid the boy for the bonds without any further inquiry. Held, the plaintiff could recover the value of the bonds. The term 'bad faith' does not necessarily involve furtive motives, but means bad faith in a commercial sense. The manner in which the de-fendants conducted their Liberty Loan department provided an easy way for thieves to dispose of their plunder. It was a case of "no questions asked." Although gross negligence does not of itself constitute bad faith, it is evidence from which bad faith may be inferred. The circumstances thrust the duty upon the defendants to make further inquiries and they had no right to shut their eyes deliberately to obvious facts. Morris v. Muir, 111 Misc. Rep. 739, 181 N.Y. Supp. 913, affd. in memo., 191 App. Div. 947, 181 N.Y. Supp. 945." (pp. 640-642, Brannan's Negotiable Instruments Law, 6th ed.).

The above considerations would seem sufficient to justify our ruling that plaintiff-appellee should not be allowed to recover the value of the check. Let us now examine the express provisions of the Negotiable Instruments Law pertinent to the matter to find if our ruling conforms thereto. Section 52 (c) provides that a holder in due course is one who takes the instrument "in good faith and for value;" Section 59, "that every holder is deemed prima facie to be a holder in due course;" and Sec-tion 52 (d), that in order that one may be a holder in due course it is necessary that "at the time the instrument was negotiated to him "he had no notice of any . . . defect in the title of the person nego-tiating it;" and lastly Section 59, that every holder is deemed prima facieto be a holder in due course.

In the case at bar the rule that a possessor of the instrument is prima faciea holder in due course does not apply because there was a defect in the title of the holder (Manuel Gonzales), because the instrument is not payable to him or to bearer. On the other hand, the stipulation of facts indicated by the appellants in their brief, like the fact that the drawer had no account with the payee; that the holder did not show or tell the payee why he had the check in his possession and why he was using it for the payment of his own personal account — show that holder's title was defective or suspi-cious, to say the least. As holder's title was defective or suspicious, it cannot be stated that the payee acquired the check without knowledge of said defect in holder's title, and for this reason the presumption that it is a holder in due course or that it acquired the instrument in good faith does not exist. And having presented no evidence that it acquired the check in good faith, it (payee) cannot be considered as a holder in due course. In other words, under the circumstances of the case, in -stead of the presumption that payee was a holder in good faith, the fact is that it acquired posses-sion of the instrument under circumstances that should have put it to inquiry as to the title of the holder who negotiated the check to it. The burden was, therefore, placed upon it to show that not-withstanding the suspicious circumstances, it acquired the check in actual good faith.

The rule applicable to the case at bar is that described in the case of Howard National Bank v. Wil-son, et al., 96 Vt. 438, 120 At. 889, 894, where the Supreme Court of Vermont made the following disquisition:

Prior to the Negotiable Instruments Act, two distinct lines of cases had developed in this country. The first had its origin in Gill v. Cubitt, 3 B. & C. 466, 10 E. L. 215, where the rule was distinctly laid down by the court of King's Bench that the purchaser of nego-tiable paper must exercise reasonable prudence and caution, and that, if the circumstances were such as ought to have excited the suspicion of a prudent and careful man, and he made no inquiry, he did not stand in the legal position of a bona fide holder. The rule was adopted by the courts of this country generally and seem to have become a fixed rule in the law of negotiable paper. Later in Goodman v. Harvey, 4 A. & E. 870, 31 E. C. L. 381, the English court abandoned its former position and adopted the rule that nothing short of actual bad faith or fraud in the purchaser would deprive him of the character of a bona fide purchaser and let in defenses existing between prior parties, that no circumstances of suspicion merely, or want of proper caution in the purchaser, would have this effect, and that even gross negligence would have no effect, except as evidence tending to establish bad faith or fraud. Some of the American courts adhered to the earlier rule, while others followed the change inaugurated in Goodman v. Harvey. The question was before this court in Roth v. Colvin, 32 Vt. 125, and, on full consideration of the question, a rule was adopted in harmony with that announced in Gill v. Cubitt, which has been adhered to in subsequent cases, including those cited above. Stated briefly, one line of cases including our own had adopted the test of the reasonably prudent man and the other that of actual good faith. It would seem that it was the intent of the Negotiable Instruments Act to har -monize this disagreement by adopting the latter test. That such is the view generally ac-cepted by the courts appears from a recent review of the cases concerning what consti-tutes notice of defect. Brannan on Neg. Ins. Law, 187-201. To effectuate the general pur-

pose of the act to make uniform the Negotiable Instruments Law of those states which should enact it, we are constrained to hold (contrary to the rule adopted in our former de-cisions) that negligence on the part of the plaintiff, or suspicious circumstances sufficient to put a prudent man on inquiry, will not of themselves prevent a recovery, but are to be considered merely as evidence bearing on the question of bad faith. See G. L. 3113, 3172, where such a course is required in construing other uniform acts.

It comes to this then: When the case has taken such shape that the plaintiff is called upon to prove himself a holder in due course to be entitled to recover, he is required to establish the conditions entitling him to standing as such, including good faith in taking the instru-ment. It devolves upon him to disclose the facts and circumstances attending the transfer, from which good or bad faith in the transaction may be inferred.

In the case at bar as the payee acquired the check under circumstances which should have put it to inquiry, why the holder had the check and used it to pay his own personal account, the duty de-volved upon it, plaintiff-appellee, to prove that it actually acquired said check in good faith. The stipulation of facts contains no statement of such good faith, hence we are forced to the conclusion that plaintiff payee has not proved that it acquired the check in good faith and may not be deemed a holder in due course thereof.

For the foregoing considerations, the decision appealed from should be, as it is hereby, reversed, and the defendants are absolved from the complaint. With costs against plaintiff-appellee.

G.R. No. 70145 November 13, 1986

MARCELO A. MESINA, petitioner, vs.THE HONORABLE INTERMEDIATE APPELLATE COURT, HON. ARSENIO M. GONONG, in his capacity as Judge of Regional Trial Court — Manila (Branch VIII), JOSE GO, and ALBERT UY, respondents.

 

PARAS, J.:

This is an appeal by certiorari from the decision of the then Intermediate Appellate Court (IAC for short), now the Court of Appeals (CA) in AC-G.R. S.P. 04710, dated Jan. 22, 1985, which dis-missed the petition for certiorari and prohibition filed by Marcelo A. Mesina against the trial court in Civil Case No. 84-22515. Said case (an Interpleader) was filed by Associated Bank against Jose Go and Marcelo A. Mesina regarding their conflicting claims over Associated Bank Cashier's Check No. 011302 for P800,000.00, dated December 29, 1983.

Briefly, the facts and statement of the case are as follows:

Respondent Jose Go, on December 29, 1983, purchased from Associated Bank Cashier's Check No. 011302 for P800,000.00. Unfortunately, Jose Go left said check on the top of the desk of the bank manager when he left the bank. The bank manager entrusted the check for safekeeping to a bank of-ficial, a certain Albert Uy, who had then a visitor in the person of Alexander Lim. Uy had to answer a phone call on a nearby telephone after which he proceeded to the men's room. When he returned to his desk, his visitor Lim was already gone. When Jose Go inquired for his cashier's check from Albert Uy, the check was not in his folder and nowhere to be found. The latter advised Jose Go to go to the bank to accomplish a "STOP PAYMENT" order, which suggestion Jose Go immediately followed. He also executed an affidavit of loss. Albert Uy went to the police to report the loss of the check, pointing to the person of Alexander Lim as the one who could shed light on it.

The records of the police show that Associated Bank received the lost check for clearing on Decem-ber 31, 1983, coming from Prudential Bank, Escolta Branch. The check was immediately dishon-ored by Associated Bank by sending it back to Prudential Bank, with the words "Payment Stopped" stamped on it. However, the same was again returned to Associated Bank on January 4, 1984 and for the second time it was dishonored. Several days later, respondent Associated Bank received a letter, dated January 9, 1984, from a certain Atty. Lorenzo Navarro demanding payment on the cashier's check in question, which was being held by his client. He however refused to reveal the name of his client and threatened to sue, if payment is not made. Respondent bank, in its letter, dated January 20, 1984, replied saying the check belonged to Jose Go who lost it in the bank and is laying claim to it.

On February 1, 1984, police sent a letter to the Manager of the Prudential Bank, Escolta Branch, re-questing assistance in Identifying the person who tried to encash the check but said bank refused saying that it had to protect its client's interest and the Identity could only be revealed with the client's conformity. Unsure of what to do on the matter, respondent Associated Bank on February 2, 1984 filed an action for Interpleader naming as respondent, Jose Go and one John Doe, Atty. Navarro's then unnamed client. On even date, respondent bank received summons and copy of the complaint for damages of a certain Marcelo A. Mesina from the Regional Trial Court (RTC) of Caloocan City filed on January 23, 1984 bearing the number C-11139. Respondent bank moved to amend its complaint, having been notified for the first time of the name of Atty. Navarro's client and substituted Marcelo A. Mesina for John Doe. Simultaneously, respondent bank, thru representa-tive Albert Uy, informed Cpl. Gimao of the Western Police District that the lost check of Jose Go is in the possession of Marcelo Mesina, herein petitioner. When Cpl. Gimao went to Marcelo Mesina to ask how he came to possess the check, he said it was paid to him by Alexander Lim in a "certain transaction" but refused to elucidate further. An information for theft (Annex J) was instituted against Alexander Lim and the corresponding warrant for his arrest was issued (Annex 6-A) which up to the date of the filing of this instant petition remains unserved because of Alexander Lim's suc -cessful evation thereof.

Meanwhile, Jose Go filed his answer on February 24, 1984 in the Interpleader Case and moved to participate as intervenor in the complain for damages. Albert Uy filed a motion of intervention and answer in the complaint for Interpleader. On the Scheduled date of pretrial conference inthe inter-pleader case, it was disclosed that the "John Doe" impleaded as one of the defendants is actually petitioner Marcelo A. Mesina. Petitioner instead of filing his answer to the complaint in the inter-pleader filed on May 17, 1984 an Omnibus Motion to Dismiss Ex Abudante Cautela alleging lack of jurisdiction in view of the absence of an order to litigate, failure to state a cause of action and lack of personality to sue. Respondent bank in the other civil case (CC-11139) for damages moved to dismiss suit in view of the existence already of the Interpleader case.

The trial court in the interpleader case issued an order dated July 13, 1984, denying the motion to dismiss of petitioner Mesina and ruling that respondent bank's complaint sufficiently pleaded a cause of action for itnerpleader. Petitioner filed his motion for reconsideration which was denied by the trial court on September 26, 1984. Upon motion for respondent Jose Go dated October 31, 1984, respondent judge issued an order on November 6, 1984, declaring petitioner in default since his period to answer has already expirecd and set the ex-parte presentation of respondent bank's ev-idence on November 7, 1984.

Petitioner Mesina filed a petition for certioari with preliminary injunction with IAC to set aside 1) order of respondent court denying his omnibus Motion to Dismiss 2) order of 3) the order of default against him.

On January 22, 1985, IAC rendered its decision dimissing the petition for certiorari. Petitioner Mesina filed his Motion for Reconsideration which was also denied by the same court in its resolu-tion dated February 18, 1985.

Meanwhile, on same date (February 18, 1985), the trial court in Civil Case #84-22515 (Inter-pleader) rendered a decisio, the dispositive portion reading as follows:

WHEREFORE, in view of the foregoing, judgment is hereby rendered ordering plaintiff Associate Bank to replace Cashier's Check No. 011302 in favor of Jose Go or its cas equivalent with legal rate of itnerest from date of complaint, and with costs of suit against the latter.

SO ORDERED.

On March 29, 1985, the trial court in Civil Case No. C-11139, for damages, is-sued an order, the pertinent portion of which states:

The records of this case show that on August 20, 1984 proceedings in this case was (were) ordered suspended because the main issue in Civil Case No. 84-22515 and in this instant case are the same which is: who between Marcelo Mesina and Jose Go is entitled to payment of Associated Bank's Cashier's Check No. CC-011302? Said issue having been resolved already in Civil casde No. 84-22515, really this instant case has become moot and academic.

WHEREFORE, in view of the foregoing, the motion sholud be as it is hereby granted and this case is ordered dismissed.

In view of the foregoing ruling no more action should be taken on the "Motion For Reconsideration (of the order admitting the Intervention)" dated June 21, 1984 as well as the Motion For Reconsideration dated September 10, 1984.

SO ORDERED.

Petitioner now comes to Us, alleging that:

1. IAC erred in ruling that a cashier's check can be countermanded even in the hands of a holder in due course.

2. IAC erred in countenancing the filing and maintenance of an interpleader suit by a party who had earlier been sued on the same claim.

3. IAC erred in upholding the trial court's order declaring petitioner as in default when there was no proper order for him to plead in the interpleader complaint.

4. IAC went beyond the scope of its certiorari jurisdiction by making findings of facts in advance of trial.

Petitioner now interposes the following prayer:

1. Reverse the decision of the IAC, dated January 22, 1985 and set aside the February 18, 1985 res-olution denying the Motion for Reconsideration.

2. Annul the orders of respondent Judge of RTC Manila giving due course to the interpleader suit and declaring petitioner in default.

Petitioner's allegations hold no water. Theories and examples advanced by petitioner on causes and effects of a cashier's check such as 1) it cannot be countermanded in the hands of a holder in due course and 2) a cashier's check is a bill of exchange drawn by the bank against itself-are general principles which cannot be aptly applied to the case at bar, without considering other things. Peti-tioner failed to substantiate his claim that he is a holder in due course and for consideration or value as shown by the established facts of the case. Admittedly, petitioner became the holder of the cashier's check as endorsed by Alexander Lim who stole the check. He refused to say how and why

it was passed to him. He had therefore notice of the defect of his title over the check from the start. The holder of a cashier's check who is not a holder in due course cannot enforce such check against the issuing bank which dishonors the same. If a payee of a cashier's check obtained it from the issu-ing bank by fraud, or if there is some other reason why the payee is not entitled to collect the check, the respondent bank would, of course, have the right to refuse payment of the check when pre-sented by the payee, since respondent bank was aware of the facts surrounding the loss of the check in question. Moreover, there is no similarity in the cases cited by petitioner since respondent bank did not issue the cashier's check in payment of its obligation. Jose Go bought it from respondent bank for purposes of transferring his funds from respondent bank to another bank near his estab-lishment realizing that carrying money in this form is safer than if it were in cash. The check was Jose Go's property when it was misplaced or stolen, hence he stopped its payment. At the outset, re-spondent bank knew it was Jose Go's check and no one else since Go had not paid or indorsed it to anyone. The bank was therefore liable to nobody on the check but Jose Go. The bank had no inten-tion to issue it to petitioner but only to buyer Jose Go. When payment on it was therefore stopped, respondent bank was not the one who did it but Jose Go, the owner of the check. Respondent bank could not be drawer and drawee for clearly, Jose Go owns the money it represents and he is there -fore the drawer and the drawee in the same manner as if he has a current account and he issued a check against it; and from the moment said cashier's check was lost and/or stolen no one outside of Jose Go can be termed a holder in due course because Jose Go had not indorsed it in due course. The check in question suffers from the infirmity of not having been properly negotiated and for value by respondent Jose Go who as already been said is the real owner of said instrument.

In his second assignment of error, petitioner stubbornly insists that there is no showing of conflict-ing claims and interpleader is out of the question. There is enough evidence to establish the con-trary. Considering the aforementioned facts and circumstances, respondent bank merely took the necessary precaution not to make a mistake as to whom to pay and therefore interpleader was its proper remedy. It has been shown that the interpleader suit was filed by respondent bank because petitioner and Jose Go were both laying their claims on the check, petitioner asking payment thereon and Jose Go as the purchaser or owner. The allegation of petitioner that respondent bank had effectively relieved itself of its primary liability under the check by simply filing a complaint for interpleader is belied by the willingness of respondent bank to issue a certificate of time deposit in the amount of P800,000 representing the cashier's check in question in the name of the Clerk of Court of Manila to be awarded to whoever wig be found by the court as validly entitled to it. Said validity will depend on the strength of the parties' respective rights and titles thereto. Bank filed the interpleader suit not because petitioner sued it but because petitioner is laying claim to the same check that Go is claiming. On the very day that the bank instituted the case in interpleader, it was not aware of any suit for damages filed by petitioner against it as supported by the fact that the in -terpleader case was first entitled Associated Bank vs. Jose Go and John Doe, but later on changed to Marcelo A. Mesina for John Doe when his name became known to respondent bank.

In his third assignment of error, petitioner assails the then respondent IAC in upholding the trial court's order declaring petitioner in default when there was no proper order for him to plead in the interpleader case. Again, such contention is untenable. The trial court issued an order, compelling petitioner and respondent Jose Go to file their Answers setting forth their respective claims. Subse-quently, a Pre-Trial Conference was set with notice to parties to submit position papers. Petitioner argues in his memorandum that this order requiring petitioner to file his answer was issued without jurisdiction alleging that since he is presumably a holder in due course and for value, how can he be compelled to litigate against Jose Go who is not even a party to the check? Such argument is trite and ridiculous if we have to consider that neither his name or Jose Go's name appears on the check. Following such line of argument, petitioner is not a party to the check either and therefore has no valid claim to the Check. Furthermore, the Order of the trial court requiring the parties to file their answers is to all intents and purposes an order to interplead, substantially and essentially and there-

fore in compliance with the provisions of Rule 63 of the Rules of Court. What else is the purpose of a law suit but to litigate?

The records of the case show that respondent bank had to resort to details in support of its action for Interpleader. Before it resorted to Interpleader, respondent bank took an precautionary and nec-essary measures to bring out the truth. On the other hand, petitioner concealed the circumstances known to him and now that private respondent bank brought these circumstances out in court (which eventually rendered its decision in the light of these facts), petitioner charges it with "gratu-itous excursions into these non-issues." Respondent IAC cannot rule on whether respondent RTC committed an abuse of discretion or not, without being apprised of the facts and reasons why re -spondent Associated Bank instituted the Interpleader case. Both parties were given an opportunity to present their sides. Petitioner chose to withhold substantial facts. Respondents were not forbid-den to present their side-this is the purpose of the Comment of respondent to the petition. IAC de-cided the question by considering both the facts submitted by petitioner and those given by respon-dents. IAC did not act therefore beyond the scope of the remedy sought in the petition.

WHEREFORE, finding that the instant petition is merely dilatory, the same is hereby denied and the assailed orders of the respondent court are hereby AFFIRMED in toto

G.R. No. L-39641 February 28, 1983

METROPOL (BACOLOD) FINANCING & INVESTMENT CORPORATION, plaintiff-ap-pellee, vs.SAMBOK MOTORS COMPANY and NG SAMBOK SONS MOTORS CO., LTD., defen-dants-appellants.

Rizal Quimpo & Cornelio P. Revena for plaintiff-appellee.

Diosdado Garingalao for defendants-appellants.

 

DE CASTRO, J.:

The former Court of Appeals, by its resolution dated October 16, 1974 certified this case to this Court the issue issued therein being one purely of law.

On April 15, 1969 Dr. Javier Villaruel executed a promissory note in favor of Ng Sambok Sons Mo-tors Co., Ltd., in the amount of P15,939.00 payable in twelve (12) equal monthly installments, be -ginning May 18, 1969, with interest at the rate of one percent per month. It is further provided that in case on non-payment of any of the installments, the total principal sum then remaining unpaid shall become due and payable with an additional interest equal to twenty-five percent of the total amount due.

On the same date, Sambok Motors Company (hereinafter referred to as Sambok), a sister company of Ng Sambok Sons Motors Co., Ltd., and under the same management as the former, negotiated and indorsed the note in favor of plaintiff Metropol Financing & Investment Corporation with the following indorsement:

Pay to the order of Metropol Bacolod Financing & Investment Corporation with recourse. Notice of Demand; Dishonor; Protest; and Presentment are hereby waived.

SAMBOK MO-TORS CO. (BA-COLOD)

By:

RODOLFO G. NONILLO Asst. General Manager

The maker, Dr. Villaruel defaulted in the payment of his installments when they became due, so on October 30, 1969 plaintiff formally presented the promissory note for payment to the maker. Dr. Villaruel failed to pay the promissory note as demanded, hence plaintiff notified Sambok as in -dorsee of said note of the fact that the same has been dishonored and demanded payment.

Sambok failed to pay, so on November 26, 1969 plaintiff filed a complaint for collection of a sum of money before the Court of First Instance of Iloilo, Branch I. Sambok did not deny its liability but contended that it could not be obliged to pay until after its co-defendant Dr. Villaruel has been de-clared insolvent.

During the pendency of the case in the trial court, defendant Dr. Villaruel died, hence, on October 24, 1972 the lower court, on motion, dismissed the case against Dr. Villaruel pursuant to Section 21, Rule 3 of the Rules of Court. 1

On plaintiff's motion for summary judgment, the trial court rendered its decision dated September 12, 1973, the dispositive portion of which reads as follows:

WHEREFORE, judgment is rendered:

(a) Ordering Sambok Motors Company to pay to the plaintiff the sum of P15,939.00 plus the legal rate of interest from October 30, 1969;

(b) Ordering same defendant to pay to plaintiff the sum equivalent to 25% of P15,939.00 plus interest thereon until fully paid; and

(c) To pay the cost of suit.

Not satisfied with the decision, the present appeal was instituted, appellant Sambok raising a lone assignment of error as follows:

The trial court erred in not dismissing the complaint by finding defendant ap-pellant Sambok Motors Company as assignor and a qualified indorsee of the subject promissory note and in not holding it as only secondarily liable thereof.

Appellant Sambok argues that by adding the words "with recourse" in the indorsement of the note, it becomes a qualified indorser that being a qualified indorser, it does not warrant that if said note is dishonored by the maker on presentment, it will pay the amount to the holder; that it only warrants the following pursuant to Section 65 of the Negotiable Instruments Law: (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.

The appeal is without merit.

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. 2 Such an indorsement relieves the indorser of the general obligation to pay if the instrument is dishonored but not of the liability arising from warranties on the instrument as pro -vided in Section 65 of the Negotiable Instruments Law already mentioned herein. However, appel-lant Sambok indorsed the note "with recourse" and even waived the notice of demand, dishonor, protest and presentment.

"Recourse" means resort to a person who is secondarily liable after the default of the person who is primarily liable. 3 Appellant, by indorsing the note "with recourse" does not make itself a qualified

indorser but a general indorser who is secondarily liable, because by such indorsement, it agreed that if Dr. Villaruel fails to pay the note, plaintiff-appellee can go after said appellant. The effect of such indorsement is that the note was indorsed without qualification. A person who indorses with-out qualification engages that on due presentment, the note shall be accepted or paid, or both as the case may be, and that if it be dishonored, he will pay the amount thereof to the holder. 4 Appellant Sambok's intention of indorsing the note without qualification is made even more apparent by the fact that the notice of demand, dishonor, protest and presentment were an waived. The words added by said appellant do not limit his liability, but rather confirm his obligation as a general indorser.

Lastly, the lower court did not err in not declaring appellant as only secondarily liable because after an instrument is dishonored by non-payment, the person secondarily liable thereon ceases to be such and becomes a principal debtor. 5 His liabiliy becomes the same as that of the original obligor. 6 Consequently, the holder need not even proceed against the maker before suing the in-dorser.

WHEREFORE, the decision of the lower court is hereby affirmed. No costs.

SO ORDERED.

G.R. No. 128927 September 14, 1999

REMEDIOS NOTA SAPIERA, petitioner, vs.COURT OF APPEALS and RAMON SUA, respondents.

 

BELLOSILLO, J.:

REMEDIOS NOTA SAPIERA appeals to us through this petition for review the Decision of the Court of Appeals 1which acquitted her of the crime of estafa but held her liable nonetheless for the value of the checks she indorsed in favor of private respondent Ramon Sua.1âwphi1.nêt

On several occasions petitioner Remedios Nota Sapiera, a sari-sari store owner, purchased from Monrico Mart certain grocery items, mostly cigarettes, and paid for them with checks issued by one Arturo de Guzman: (a) PCIB Check No. 157059 dated 26 February 1987 for P140,000.00; (b) PCIB Check No. 157073 dated 26 February 1987 for P28,000.00; (c) PCIB Check No. 157057 dated 27 February 1987 for P42,150.00; and, d) Metrobank Check No. DAG-045104758 PA dated 2 March 1987 for P125,000.00. These checks were signed at the back by petitioner. When pre-sented for payment the checks were dishonored because the drawer's account was already closed. Private respondent Ramon Sua informed Arturo de Guzman and petitioner about the dishonor but both failed to pay the value of the checks. Hence, four (4) charges of estafa were filed against peti-tioner with the Regional Trial Court of Dagupan City, docketed as Crim. Cases Nos. D-8728, D-8729, D-8730 and D-8731. Arturo de Guzman was charged with two (2) counts of violation of B.P. Blg. 22, docketed as Crim. Cases Nos. D-8733 and D-8734. These cases against petitioner and de Guzman were consolidated and tried jointly.

On 27 December 1989 the court a quo 2 acquitted petitioner of all the charges of estafa but did not rule on whether she could be held civilly liable for the checks she indorsed to private respondent. The trial court found Arturo de Guzman guilty of Violation of B.P. Blg. 22 on two (2) counts and sentenced him to suffer imprisonment of six (6) months and one (1) day in each of the cases, and to pay private respondent P167,150.00 as civil indemnity.

Private respondent filed a notice of appeal with the trial court with regard to the civil aspect but the court refused to give due course to the appeal on the ground that the acquittal of petitioner was ab-

solute. Private respondent then filed a petition for mandamus with the Court of Appeals, docketed as CA-GR SP No. 24626, praying that the court a quo be ordered to give due course to the appeal on the civil aspect of the decision. The Court of Appeals granted the petition and ruled that private respondent could appeal with respect to the civil aspect the judgment of acquittal by the trial court.

On 22 January 1996, the Court of Appeals in CA-GR CV No. 36376 rendered the assailed Decision insofar as it sustained the appeal of private respondent on the civil aspect and ordering petitioner to pay private respondent P335,000.00 representing the aggregate face value of the four (4) checks in-dorsed by petitioner plus legal interest from the notice of dishonor.

Petitioner filed a motion for reconsideration of the Decision. On 19 March 1997 the Court of Ap-peals issued a Resolution noting the admission of both parties that private respondent had already collected the amount of P125,000.00 from Arturo de Guzman with regard to his civil liability in Crim. Cases Nos. 8733 and 8734. The appellate court noted that private respondent was the same offended party in the criminal cases against petitioner and against de Guzman. Criminal Cases Nos. 8733 and 8734 against De Guzman, and Crim. Cases Nos. 8730 and 8729 against petitioner, in-volved the same checks, to wit: PCIB Checks Nos. 157057 for P42,150.00 and Metrobank Check No. DAG-045104758 PA for P125,000.00.

Thus, the Court of Appeals ruled that private respondent could not recover twice on the same checks. Since he had collected P125,000.00 as civil indemnity in Crim. Cases Nos. 8733 and 8734, this amount should be deducted from the sum total of the civil indemnity due him arising from the estafa cases against petitioner. The appellate court then corrected its previous award, which was er -roneously placed, at P335,000,00, to P335,150,00 as the sum total of the amounts of the four (4) checks involved. Deducting the amount of P125,000.00 already collected by private respondent, pe-titioner was adjudged to pay P210,150.00 as civil liability to private respondent. Hence, this peti-tion alleging that respondent Court of Appeals erred in holding petitioner civilly liable to private re-spondent because her acquittal by the trial court from charges of estafa in Crim. Cases Nos. D-8728, D-8729, D-8730 and D-8731 was absolute, the trial court having declared in its decision that the fact from which the civil liability might have arisen did not exist.

We cannot sustain petitioner. The issue is whether respondent Court of Appeals committed re-versible error in requiring petitioner to pay civil indemnity to private respondent after the trial court had acquitted of her of the criminal charges. Section 2, par. (b), of Rule 111 of the Rules of Court, as amended, specifically provides: "Extinction of the penal action does not carry with it extinction of the civil, unless the extinction proceed from a declaration in a final judgment that the fact from which the civil might arise did not exist."

The judgment of acquittal extinguishes the liability of the accused for damages only when it in -cludes a declaration that the fact from which the civil liability might arise did not exist. Thus, the civil liability is not extinguished by acquittal where: (a) the acquittal is based on reasonable doubt; (b) where the court expressly declares that the liability of the accused is not criminal but only civil in nature; and, (c) where the civil liability is not derived from or based on the criminal act of which the accused is acquitted. 3 Thus, under Art. 29 of the Civil Code —

When the accused in a criminal prosecution is acquitted on the ground that his guilt has not been proved beyond reasonable doubt, a civil action for damages for the same act or omission may be instituted. Such action requires only a pre-ponderance of evidence. Upon motion of the defendant, the court may require the plaintiff to file a bond to answer for damages in case the complaint should be found to be malicious.

In a criminal case where the judgment of acquittal is based upon reasonable doubt, the court shall so declare. In the absence of any declaration to that effect,

it may be inferred from the text of the decision whether or not acquittal is due to that ground.

An examination of the decision in the criminal cases reveals these findings of the trial court —

Evidence for the prosecution tends to show that on various occasions, Remedios Nota Sapiera purchased from Monrico Mart grocery items (mostly cigarettes) which purchases were paid with checks issued by Arturo de Guzman: that those purchases and payments with checks were as follows:

(a) Sales Invoice No. 20104 dated February 26, 1987 in the amount of P28,000.00, that said items purchased were paid with PCIBank Check No. 157073 dated February 26, 1987;

(b) Sales Invoice No. 20108 dated February 26, 1987 in the amount of P140,000.00; that said items purchased were paid with PCIBank No. 157059 dated February 26, 1987;

(c) Sales Invoice No. 20120 dated February 27, 1987 in the amount of P42,150.00; that said items were paid with PCIBank Check No. 157057 dated February 27, 1987;

(d) Sales Invoice No. 20148 and 20149 both dated March 2, 1987 in the amount of P120,103.75; said items were paid with Metrobank Check No. 045104758 dated March 2, 1987 in the amount of P125,000.00.

That all these checks were deposited with the Consolidated Bank and Trust Company, Dagupan Branch, for collection from the drawee bank;

That when presented for payment by the collecting bank to the drawee bank, said checks were dishonored due to account closed, as evidenced by check re-turn slips; . . . . .

From the evidence, the Court finds that accused Remedios Nota Sapiera is the owner of a sari-sari store inside the public market; that she sells can(ned) goods, candies and assorted grocery items; that she knows accused Arturo De Guzman, a customer since February 1987; that de Guzman purchases from her grocery items including cigarettes; that she knows Ramon Sua; that she has business dealings with him for 5 years; that her purchase orders were in clean sheets of paper; that she never pays in check; that Ramon Sua asked her to sign subject checks as identification of the signature of Arturo de Guzman; that she pays in cash; sometimes delayed by several days; that she signed the four (4) checks on the reverse side; that she did not know the subject invoices; that de Guzman made the purchases and he issued the checks; that the goods were delivered to de Guzman; that she was not informed of dishonored checks; and that counsel for Ramon Sua informed de Guzman and told him to pay . . . .

In the case of accused Remedios Nota Sapiera, the prosecution failed to prove conspiracy.

Based on the above findings of the trial court, the exoneration of petitioner of the charges of estafa was based on the failure of the prosecution to present sufficient evidence showing conspiracy be-tween her and the other accused Arturo de Guzman in defrauding private respondent. However, by her own testimony, petitioner admitted having signed the four (4) checks in question on the reverse side. The evidence of the prosecution shows that petitioner purchased goods from the grocery store

of private respondent as shown by the sales invoices issued by private respondent; that these pur -chases were paid with the four (4) subject checks issued by de Guzman; that petitioner signed the same checks on the reverse side; and when presented for payment, the checks were dishonored by the drawee bank due to the closure of the drawer's account; and, petitioner was informed of the dis-honor.1âwphi1.nêt

We affirm the findings of the Court of Appeals that despite the conflicting versions of the parties, it is undisputed that the four (4) checks issued by de Guzman were signed by petitioner at the back without any indication as to how she should be bound thereby and, therefore, she is deemed to be an indorser thereof. The Negotiable Instruments Law clearly provides —

Sec. 17. Construction where instrument is ambiguous. — Where the language of the instrument is ambiguous, or there are admissions therein, the following rules of construction apply: . . . . (f) Where a signature is so placed upon the in-strument that it is not clear in what capacity the person making the same in-tended to sign, he is deemed an indorser. . . .

Sec. 63. When person deemed indorser. — A person placing his signature upon all instrument otherwise than as maker, drawer or acceptor, is deemed to be an indorser unless he clearly indicates by appropriate words his intention to be bound in some other capacity.

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 sec-tion; and (b) That the instrument is, at the time of the 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 dishon-ored 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 com-pelled to pay it.

The dismissal of the criminal cases against petitioner did not erase her civil liability since the dis -missal was due to insufficiency of evidence and not from a declaration from the court that the fact from which the civil action might arise did not exist. 4 An accused acquitted of estafa may be nev-ertheless be held civilly liable where the facts established by the evidence so warrant. The accused should be adjudged liable for the unpaid value of the checks signed by her in favor of the com-plainant. 5

The rationale behind the award of civil indemnity despite a judgment of acquittal when evidence is sufficient to sustain the award was explained by the Code Commission in connection with Art. 29 of the Civil Code, to wit:

The old rule that the acquittal of the accused in a criminal case also releases him from civil liability is one of the most serious flaws in the Philippine legal sys-tem. It has given rise to numberless instances of miscarriage of justice, where the acquittal was due to a reasonable doubt in the mind of the court as to the guilt of the accused. The reasoning followed is that inasmuch as the civil re-sponsibility is derived from the criminal offense, when the latter is not proved, civil liability cannot be demanded.

This is one of those cases where confused thinking leads to unfortunate and de-plorable consequences. Such reasoning fails to draw a clear line of demarcation

between criminal liability and civil responsibility, and to determine the logical result of the distinction. The two liabilities are separate and distinct from each other. One affects the social order and the other private rights. One is for pun-ishment or correction of the offender while the other is for reparation of dam-ages suffered by file aggrieved party . . . . It is just and proper that for the pur-poses of imprisonment of or fine upon the accused, the offense should be proved beyond reasonable doubt. But the purpose of indemnifying the com-plaining party, why should the offense also be proved beyond reasonable doubt? Is not the invasion or violation of every private right to be proved only by pre-ponderance of evidence? Is the right of the aggrieved person any less private because the wrongful acts is also punishable by the criminal law? 6

Finally, with regard to the computation of the civil liability of petitioner, the finding of the Court of Appeals that petitioner is civilly liable for the aggregate value of the unpaid four (4) checks subject of the criminal cases in the sum of P335,150.00, less the amount of P125.000.00 already collected by private respondent pending appeal, resulting in the amount of P210,150.00 still due private re-spondent, is a factual matter which is binding and conclusive upon this Court.

WHEREFORE, the petition is DENIED. The Decision of the Court of Appeals dated 22 January 1996 as amended by its Resolution dated 19 March 1997 ordering petitioner Remedios Nota Sapiera to pay the private respondent Ramon Sua the remaining amount of P210,150.00 as civil lia -bility, is AFFIRMED. Costs against petitioners.1âwphi1.nêt

SO ORDERED.

Mendoza, Quisumbing and Buena, JJ., concur.

[G.R. No. 130756.  January 21, 1999]

ESTER B. MARALIT, petitioner, vs. JESUSA CORAZON L. IMPERIAL, re-spondent.

D E C I S I O N

MENDOZA, J.:

This is a petition for review on certiorari of the decision, dated August 26, 1997, and the resolution, dated September 29, 1997, of the Regional Trial Court of Naga City (Branch 21) in Special Civil Case No. RTC ’97-3744.

The facts are as follows:

Petitioner Ester B. Maralit filed three complaints for estafa through falsifi-cation of commercial documents through reckless imprudence against respon-dent Jesusa Corazon L. Imperial.[1] Maralit alleged that she was assistant man-ager of the Naga City branch of the Philippine National Bank (PNB); that on May 20, 1992, June 1, 1992, and July 1, 1992 respondent Imperial  separately deposited in her savings account at the PNB three United States treasury war-rants bearing USTW Nos. 2034-91254963, 2034-91180047, and 2034-33330760 and on the same days withdrew their peso equivalent of P59,216.86, P130,743.60, and P130,326.00, respectively; and that the trea-sury warrants were subsequently returned one after the other by the United States Treasury, through the Makati branch of the Citibank, on the ground that the amounts thereof had been altered. Maralit claimed that, as a consequence, she was held personally liable by the PNB for the total amount ofP320,287.30.

In her counter-affidavit, respondent claimed that she merely helped a rela-tive, Aida Abengoza, encash the treasury warrants; that she deposited the treasury warrants in her savings account and then withdrew their peso equiva-lent with the approval of petitioner; that she gave the money to Aida Aben-goza; that she did not know that the amounts on the treasury warrants had been altered nor did she represent to petitioner that the treasury warrants were genuine; and that upon being informed of the dishonor of the warrants she immediately contacted Aida Abengoza and signed an acknowledgment of debt promising to pay the total amount of the treasury warrants.

After preliminary investigation, the City Prosecutor of Naga City filed three informations against respondent in the Municipal Trial Court of Naga City (Branch 3).

On September 26, 1996, judgment was rendered as follows:

WHEREFORE, in view of the foregoing considerations, the Court finds no ground to hold the accused criminally liable for which she is charged, hence Corazon Jesusa L. Imperial is ACQUITTED of all the charges against her.  The accused however is civilly liable as indorser of the checks which is (sic) the subject mat-ter of the criminal action.[2]

The decision having become final and executory, the MTC, on November 11, 1996, ordered the enforcement of the civil liability against the accused arising from the criminal action.[3] The writ of execution, dated December 9, 1996, directed the sheriff as follows:[4]

NOW, THEREFORE, you are hereby commanded to cause the execution of the aforesaid judgment in the amount of THREE HUNDRED TWENTY THOUSAND TWO HUNDRED EIGHTY SIX & 46/100 (P320,286.46) ONLY, equivalent to the amount of the 3 three US$ checks amounting to $12,621.13, and to levy the goods and chattels of the defendant/s, except those which are exempt from ex-ecution and to make the sale thereat in accordance with the procedure out-lined by Rule 39, Revised Rules of Court and such cases made and provided, together with all your lawful fees for the services of this writ.

Accordingly, the sheriff served a notice of garnishment on the PNB.

Respondent at first moved to declare her savings account exempt from ex-ecution on the ground that the same represented her salary as an employee of the Commission on Audit, which was not even sufficient for her expenses and that of her family.  Later, she moved to quash the writ of execution on the ground “that the judgment did not order the accused to pay [a] specific amount of money to a particular person as it merely adjudicated the criminal aspect but not the civil aspect hence there was no judgment rendered which can be the subject of execution.”

Both motions of respondent were denied by the MTC for lack of merit in its order, dated February 24, 1997.[5] Accordingly, an alias writ of execution was issued.

On April 14, 1997, respondent filed a petition for certiorari and prohibition in the Regional Trial Court of Naga City, contending that the writ of execution issued by the MTC was at variance with the judgment in the criminal cases.

The RTC issued a writ of preliminary injunction enjoining enforcement of the writ of execution issued by the MTC.  On August 26, 1997, it rendered a de-cision, which, among other things, made permanent the injunction. The RTC held that the decision of the MTC did not really find respondent liable for P320,286.46 because in fact it was petitioner who was found responsible for making the defraudation possible.

Petitioner moved for reconsideration alleging that respondent filed her pe-tition for certiorari and prohibition more than three months after the MTC had ordered execution of its decision on November 11, 1996.   However, her motion was denied on September 28, 1997.[6] The RTC held that the three-month pe-riod should be counted from April 1, 1997, when the alias writ of execution was issued, or from April 7, 1997, when the MTC denied private respondent’s mo-tion for reconsideration of the order denying her motion to quash the writ of execution.  The RTC likewise found the second ground of petitioner’s motion for reconsideration, i.e., that its decision was contrary to law and jurisprudence, devoid of merit.

Hence, this petition. Petitioner raises the following issues:[7]

1.  Whether respondent’s Petition for Certiorari and Prohibition under Rule 65 of the Rules of Court was filed out of time;

2.  Whether this case warrants the relaxation of the rule that “Certio-rari is not a substitute for a lost or lapsed appeal.”

3.  Whether or not the MTC committed grave abuse of discretion amounting to lack or excess of jurisdiction, when it issued the Or-der of Execution, Writ of Execution and Alias Writ of Execution to

implement its final and executory civil judgment in Criminal Cases No. 68697, 68698 and 68699, which reads:  “. . .The accused how-ever is civilly liable as indorser of the checks subject matter of the criminal action.”

4.  Whether or not the MTC merely adjudicated the criminal aspect but not the civil aspect of Criminal Cases 68697, 68698 and 68699.

5.  Whether there was substantial variance as between the disposi-tive portion of the civil judgment and the writ of execution issued thereunder.

6.  Whether or not a court exercising certiorari jurisdiction has the au-thority to modify or alter the final and executory decision of the lower court even by way of an obiter dictum.

Petitioner contends that the phrase “civilly liable” in the judgment part of the MTC’s decision also connotes an order to pay on respondent’s part.

It may fairly be assumed that the decision of the MTC was an adjudication of both the criminal and civil liability of respondent inasmuch as it does not ap-pear that petitioner instituted a separate civil action or reserved or waived the right to bring such action.  The question is whether the decision of the MTC finds respondent civilly liable and, in the affirmative, for how much.  As already stated, the RTC held that the MTC did not really find respondent liable.  In reaching that conclusion, the RTC said: 

A mere reading of the dispositive portion of the judgment and the writ of exe-cution will readily show that there is variance between the two.  Whereas, the judgment pronounced [respondent herein] to be “civilly liable as indorser of the checks which is the subject matter of the criminal action,” the writ of exe-cution commanded the Sheriff “to cause the execution of the aforesaid judg-ment in the amount of THREE HUNDRED TWENTY THOUSAND TWO HUNDRED EIGHTY SIX & 46/100 (P320,286.46) ONLY, equivalent to the amount of the 3 three US$ checks amounting to $12,621.13, . . . .”  In the judgment, nothing is mentioned about the amount for which [respondent herein] is liable as in-dorser, but in the writ of execution, the civil liability of the [respondent herein] has   already been fixed at P320,286.46.  The variance, therefore, between the judgment and the writ of execution is substantial because it consists of the ad-dition of the amount of the civil liability of the [respondent herein]. 

. . . .

. . .  The [MTC’s] findings of facts and conclusions of law as expressed in the body of the decision do not support the dispositive portion of the judg-ment that [respondent herein] is civilly liable. On the contrary a read-ing of the body of the judgment in question will show that [respon-dent] is not civilly liable. For three (3) times, the Court stated in the body of its decision that it is [petitioner] Maralit herself who should be faulted

and be held responsible for the payment of the dishonored US Dollar checks.

Hereunder quoted are portions of the body of the decision in question showing that [respondent] herein should not be held civilly liable and that it was [peti-tioner] Maralit who should be blamed and be held responsible:

. . . The Court however is quite intrigue[d] on why the accused was allowed to encash the peso equivalent despite the fact that the check was deposited for collection and clearing. It is the established procedure of banks that out of town checks and US Treasury Warrants should first be cleared before the same is to be paid. More so if the holder is a second indorser.  The private com-plainant in this regard explained that [as assistant branch manager] she has the discretion and that there is no hold order appearing in the savings account of the accused.  She likewise explained that she trusted the accused whom she knew is working in the same building and a depositor.  In short she took the risk of approving the withdrawal of the peso equivalent, without the check be-ing cleared and if the same is dishonored she should be responsible. (page 5, judgment).

The information accuses the accused for disregarding the banking laws and procedure of the PNB.  This is a generous statement. In the first place the ac-cused is not an employee of the bank.  She has no control nor supervision over its employees.  If there is anyone who has disregarded banking laws, it is the private complainant for approving withdrawals before the check were cleared.  Mrs. Maralit is more knowledgeable of the banking procedures of the bank of which she is the assistant manager.  She knows the risk of approving encashment before clearing.  She took the risk therefore she should be responsible for the outcome of the risk she has taken. (page 6, Judg-ment).

The Court is of the opinion that there was negligence on both the complainant and the accused but greater responsibility should be borne by the pri-vate complainant.  The accused could not have encashed and deposited the checks without her approval.  If the complainant was not remiss in her duty in imposing the banking rules strictly, then these things could not have hap-pened. (page 7, Judgment).[8]

This portion of the decision of the MTC actually refers to respondent’s criminal liability and not her civil liability.  More specifically, the portion in ques-tion refers to the allegations in the three informations that respondent commit-ted falsification of commercial documents through reckless imprudence by “1) taking advantage of [her] position as state auditor of the Commission on Audit assigned at the PNB, Naga Branch, 2) disregard[ing] existing procedure, bank-ing laws, policies, and circulars of the PNB, 3) . . . not tak[ing] the necessary precaution to determine the genuineness of the Treasury Warrants and the al-teration of the amount[s] therein deposited and [in] encash[ing] the checks, and 4) . . . [her] negligence, carelessness, and imprudence [which] caused damage and loss to [petitioner].”[9] Nevertheless, the MTC held that respon-dent was civilly liable as the penultimate paragraph of its decision makes clear:

The Court symphatizes with the complainant that there was indeed damage and loss, but said loss is chargeable to the accused who upon her indorse-

ments warrant that the instrument is genuine in all respect what it purports to be and that she will pay the amount thereof in case of dishonor.   (Sec. 66 Ne-gotiable Instrument Law)[10]

Thus, while the MTC found petitioner partly responsible for the encash-ment of the altered checks, it found respondent civilly liable because of her in-dorsements of the treasury warrants, in addition to the fact that respondent ex-ecuted a notarized acknowledgment of debt promising to pay the total amount of said warrants.

In this case, to affirm the RTC’s decision would be to hold that  respondent was absolved from both criminal and civil liability by the MTC.  Such reading of the MTC decision will not, however, bear analysis. For one, the dispositive por-tion of the decision of the MTC expressly declares respondent to be “civilly li-able as indorser of the checks which is [sic] the subject matter of the criminal action.” To find therefore that there is no declaration of civil liability of respon-dent would be to disregard the judgment of the MTC.  Worse, it would be to amend a final and executory decision of a court.

It is argued that the decision of the MTC did not order respondent, as ac-cused in the case, to pay a specific amount of money to any particular person such that it could not be an adjudication of respondent’s civil liability. However, the ambiguity can easily be clarified by a resort to the text of the decision or, what is properly called, the opinion part.  Doing so, it is clear that it can only be to petitioner that respondent was made liable as the former was the offended party in the case.  As for what amount respondent is liable, it can only be for the total amount of the treasury warrants subject of the case, determined ac-cording to their peso equivalent, in the decision of the MTC.

For another, that respondent should pay petitioner the amounts of the al-tered treasury warrants is the logical consequence of the MTC’s  holding that private respondent is civilly liable for the treasury warrants subject of the case.[11]

WHEREFORE, the decision of the Regional Trial Court of Naga City (Branch 21) is REVERSED.

SO ORDERED.

Bellosillo (Chairman), Puno, Quisumbing, and Buena, JJ., concur.G.R. No. L-17845             April 27, 1967

INTESTATE ESTATE OF VICTOR SEVILLA. SIMEON SADAYA, petitioner, vs.FRANCISCO SEVILLA, respondent.

Belen Law Offices for petitioner.Poblador, Cruz & Nazareno for respondent.

SANCHEZ, J.:

On March 28, 1949, Victor Sevilla, Oscar Varona and Simeon Sadaya executed, jointly and sever-ally, in favor of the Bank of the Philippine Islands, or its order, a promissory note for P15,000.00 with interest at 8% per annum, payable on demand. The entire, amount of P15,000.00, proceeds of the promissory note, was received from the bank by Oscar Varona alone. Victor Sevilla and Simeon Sadaya signed the promissory note as co-makers only as a favor to Oscar Varona. Payments were made on account. As of June 15, 1950, the outstanding balance stood P4,850.00. No payment there-after made.

On October 6, 1952, the bank collected from Sadaya the foregoing balance which, together with in-terest, totalled P5,416.12. Varona failed to reimburse Sadaya despite repeated demands.

Victor Sevilla died. Intestate estate proceedings were started in the Court of First Instance of Rizal, Special Proceeding No. 1518. Francisco Sevilla was named administrator.

In Special Proceeding No. 1518, Sadaya filed a creditor's claim for the above sum of P5,746.12, plus attorneys fees in the sum of P1,500.00. The administrator resisted the claim upon the averment that the deceased Victor Sevilla "did not receive any amount as consideration for the promissory note," but signed it only "as surety for Oscar Varona".

On June 5, 1957, the trial court issued an order admitting the claim of Simeon Sadaya in the amount of P5,746.12, and directing the administrator to pay the same from any available funds be -longing to the estate of the deceased Victor Sevilla.

The motion to reconsider having been overruled, the administrator appealed.1 The Court of Ap-peals, in a decision promulgated on July, 15, 1960, voted to set aside the order appealed from and to disapprove and disallow "appellee's claim of P5,746.12 against the intestate estate."

The case is now before this Court on certiorari to review the judgment of the Court of Appeals.

Sadaya's brief here seeks reversal of the appellate court's decision and prays that his claim "in the amount of 50% of P5,746.12, or P2,873.06, against the intestate estate of the deceased Victor Sevilla," be approved.

1. That Victor Sevilla and Simeon Sadaya were joint and several accommodation makers of the 15,000.00-peso promissory note in favor of the Bank of the Philippine Islands, need not be essayed. As such accommodation the makers, the individual obligation of each of them to the bank is no dif-ferent from, and no greater and no less than, that contract by Oscar Varona. For, while these two did not receive value on the promissory note, they executed the same with, and for the purpose of lend -ing their names to, Oscar Varona. Their liability to the bank upon the explicit terms of the promis-sory note is joint and several.2 Better yet, the bank could have pursued its right to collect the un-paid balance against either Sevilla or Sadaya. And the fact is that one of the last two, Simeon Sa-daya, paid that balance.

2. It is beyond debate that Simeon Sadaya could have sought reimbursement of the total amount paid from Oscar Varona. This is but right and just. Varona received full value of the promissory note.3 Sadaya received nothing therefrom. He paid the bank because he was a joint and several obligor. The least that can be said is that, as between Varona and Sadaya, there is an implied con-tract of indemnity. And Varona is bound by the obligation to reimburse Sadaya.4

3. The common creditor, the Bank of the Philippine Islands, now out of the way, we first look into the relations inter se amongst the three consigners of the promissory note. Their relations vis-a-vis the Bank, we repeat, is that of joint and several obligors. But can the same thing be said about the relations of the three consigners, in respect to each other?

Surely enough, as amongst the three, the obligation of Varona and Sevilla to Sadaya who paid can not be joint and several. For, indeed, had payment been made by Oscar Varona, instead of Simeon

Sadaya, Varona could not have had reason to seek reimbursement from either Sevilla or Sadaya, or both. After all, the proceeds of the loan went to Varona and the other two received nothing there-from.

4. On principle, a solidary accommodation maker — who made payment — has the right to contri-bution, from his co-accommodation maker, in the absence of agreement to the contrary between them, and subject to conditions imposed by law. This right springs from an implied promise be-tween the accommodation makers to share equallythe burdens that may ensue from their having consented to stamp their signatures on the promissory note.5 For having lent their signatures to the principal debtor, they clearly placed themselves — in so far as payment made by one may create li-ability on the other — in the category of mere joint grantors of the former.6  This is as it should be. Not one of them benefited by the promissory note. They stand on the same footing. In misfortune, their burdens should be equally spread.

Manresa, commenting on Article 1844 of the Civil Code of Spain,7 which is substantially repro-duced in Article 20738 of our Civil Code, on this point stated:

Otros, como Pothier, entienden que, si bien el principio es evidente enestricto concepto juridico, se han extremado sus consecuencias hasta el punto de que estas son contrarias, no solo a la logica, sino tambien a la equidad, que debe ser el alma del Derecho, como ha dicho Laurent.

Esa accion — sostienen — no nace de la fianza, pues, en efecto, el hecho de afianzar una misma deuda no crea ningun vinculo juridico, ni ninguna razon de obligar entre los fi -adores, sino que trae, por el contrario, su origen de una acto posterior, cual es el pago de toda la deuda realizado por uno de ellos, y la equdad, no permite que los denias fiadores, que igualmente estaban estaban obligos a dicho pago, se aprovenchen de ese acto en per-juico del que lo realozo.

Lo cierto es que esa accion concedida al fiador nace, si, del hecho del pago, pero es con-secuencia del beneficio o del derecho de division, como tenemos ya dicho. En efecto, por virtud de esta todos los cofiadores vienen obligados a contribuir al pago de parte que a cada uno corresponde. De ese obligacion, contraida por todos ellos, se libran los que no han pagado por consecuencia del acto realizado por el que pago, y si bien este no hizo mas que cumplir el deber que el contracto de fianza le imponia de responder de todo el debito cuando no limito su obligacion a parte alguna del mismo, dicho acto redunda en beneficio de los otros cofiadores los cuales se aprovechan de el para quedar desligados de todo compromiso con el acreedor.9

5. And now, to the requisites before one accommodation maker can seek reimbursement from a co-accommodation maker.

By Article 18 of the Civil Code in matters not covered by the special laws, "their deficiency shall be supplied by the provisions of this Code". Nothing extant in the Negotiable Instruments Law would define the right of one accommodation maker to seek reimbursement from another. Perforce, we must go to the Civil Code.1äwphï1.ñët

Because Sevilla and Sadaya, in themselves, are but co-guarantors of Varona, their case comes within the ambit of Article 2073 of the Civil Code which reads:

ART. 2073. When there are two or more guarantors of the same debtor and for the same debt, the one among them who has paid may demand of each of the others the share which is proportionally owing from him.

If any of the guarantors should be insolvent, his share shall be borne by the others, includ-ing the payer, in the same proportion.

The provisions of this article shall not be applicable, unless the payment has been made in virtue of a judicial demand or unless the principal debtor is insolvent.10

As Mr. Justice Street puts it: "[T]hat article deals with the situation which arises when one surety has paid the debt to the creditor and is seeking contribution from his cosureties."11

Not that the requirements in paragraph 3, Article 2073, just quoted, are devoid of cogent reason. Says Manresa:12

c) Requisitos para el ejercicio del derecho de reintegro o de reembolso derivado de la corresponsabilidad de los cofiadores.

— La tercera de las prescripciones que comprende el articulo se refiere a los requisitos que deben concurrir para que pueda tener lugar lo dispuesto en el mismo. Ese derecho que concede al fiador para reintegrarse directamente de los fiadores de lo que pago por el-los en vez de dirigir su reclamacion contra el deudor, es un beneficio otorgado por la ley solo ell dos casos determinados, cuya justificacion resulta evidenciada desde luego; y esa limitacion este debidamente aconsejada por una razon de prudencia que no puede de-sconocerse, cual es la de evitar que por la mera voluntad de uno de los cofiadores pueda hacerse surgir la accion de reintegro contra los demas en prejuicio de los mismos.

El perjuicio que con tal motivo puede inferirse a los cofiadores es bien notorio, pues te-niendo en primer termino el fiador que paga por el deudor el derecho de indemniza-cion contra este, sancionado por el art. 1,838, es de todo punto indudable que ejercitando esta accion pueden quedar libres de toda responsabilidad los demas cofiadores si, a con-secuencia de ella, indemniza el fiado a aquel en los terminos establecidos en el expresado articulo. Por el contrario de prescindir de dicho derecho el fiador, reclamando de los con-fiadores en primer lugar el oportuno reintegro, estos en tendrian mas remedio que satis-facer sus ductares respectivas, repitiendo despues por ellas contra el deudor con la im-posicion de las molestias y gastos consiguientes.

No es aventurado asegurar que si el fiador que paga pudiera libremente utilizar uno u otro de dichos derechos, el de indemnizacion por el deudor y el del reintegro por los cofi -adores, indudablemente optaria siempre y en todo caso por el segundo, puesto que mucha mas garantias de solvencia y mucha mas seguridad del cobro ha de encontrar en los fi-adores que en el deudor; y en la practica quedaria reducido el primero a la indemnizacion por el deudor a los confiadores que hubieran hecho el reintegro, obligando a estos, sin ex-cepcion alguna, a soportar siempre los gastos y las molestias que anteriormente homos in-dicado. Y para evitar estos perjuicios, la ley no ha podido menos de reducir el ejercicio de ese derecho a los casos en que absolutamente sea indispensable.13

6. All of the foregoing postulate the following rules: (1) A joint and several accommodation maker of a negotiable promissory note may demand from the principal debtor reimbursement for the amount that he paid to the payee; and (2) a joint and several accommodation maker who pays on the said promissory note may directly demand reimbursement from his co-accommodation maker without first directing his action against the principal debtor provided that (a) he made the payment by virtue of a judicial demand, or (b) a principal debtor is insolvent.

The Court of Appeals found that Sadaya's payment to the bank "was made voluntarily and without any judicial demand," and that "there is an absolute absence of evidence showing that Varona is in -solvent". This combination of fact and lack of fact epitomizes the fatal distance between payment by Sadaya and Sadaya's right to demand of Sevilla "the share which is proportionately owing from him."

For the reasons given, the judgment of the Court of Appeals under review is hereby affirmed. No costs. So ordered.

Concepcion, C.J., Reyes, J.B.L., Dizon, Regala, Makalintal, Bengzon, J.P., Zaldivar and Castro, JJ., concur.

G.R. No. 80599 September 15, 1989

ERNESTINA CRISOLOGO-JOSE, petitioner, vs.COURT OF APPEALS and RICARDO S. SANTOS, JR. in his own behalf and as Vice-Presi -dent for Sales of Mover Enterprises, Inc., respondents.

Melquiades P. de Leon for petitioner.

Rogelio A. Ajes for private respondent.

 

REGALADO, J.:

Petitioner seeks the annulment of the decision 1 of respondent Court of Appeals, promulgated on September 8, 1987, which reversed the decision of the trial Court 2 dismissing the complaint for consignation filed by therein plaintiff Ricardo S. Santos, Jr.

The parties are substantially agreed on the following facts as found by both lower courts:

In 1980, plaintiff Ricardo S. Santos, Jr. was the vice-president of Mover Enter-prises, Inc. in-charge of marketing and sales; and the president of the said cor-poration was Atty. Oscar Z. Benares. On April 30, 1980, Atty. Benares, in ac-commodation of his clients, the spouses Jaime and Clarita Ong, issued Check No. 093553 drawn against Traders Royal Bank, dated June 14, 1980, in the amount of P45,000.00 (Exh- 'I') payable to defendant Ernestina Crisologo-Jose. Since the check was under the account of Mover Enterprises, Inc., the same was to be signed by its president, Atty. Oscar Z. Benares, and the treasurer of the said corporation. However, since at that time, the treasurer of Mover Enterprises was not available, Atty. Benares prevailed upon the plaintiff, Ricardo S. Santos, Jr., to sign the aforesaid chEck as an alternate story. Plaintiff Ricardo S. Santos, Jr. did sign the check.

It appears that the check (Exh. '1') was issued to defendant Ernestina Crisologo-Jose in consideration of the waiver or quitclaim by said defendant over a certain property which the Government Service Insurance System (GSIS) agreed to sell to the clients of Atty. Oscar Benares, the spouses Jaime and Clarita Ong, with the understanding that upon approval by the GSIS of the compromise agree-ment with the spouses Ong, the check will be encashed accordingly. However, since the compromise agreement was not approved within the expected period of time, the aforesaid check for P45,000.00 (Exh. '1') was replaced by Atty. Benares with another Traders Royal Bank cheek bearing No. 379299 dated Au-gust 10, 1980, in the same amount of P45,000.00 (Exhs. 'A' and '2'), also payable to the defendant Jose. This replacement check was also signed by Atty. Oscar Z. Benares and by the plaintiff Ricardo S. Santos, Jr. When defendant de-posited this replacement check (Exhs. 'A' and '2') with her account at Family Savings Bank, Mayon Branch, it was dishonored for insufficiency of funds. A subsequent redepositing of the said check was likewise dishonored by the bank for the same reason. Hence, defendant through counsel was constrained to file a

criminal complaint for violation of Batas Pambansa Blg. 22 with the Quezon City Fiscal's Office against Atty. Oscar Z. Benares and plaintiff Ricardo S. San-tos, Jr. The investigating Assistant City Fiscal, Alfonso Llamas, accordingly filed an amended information with the court charging both Oscar Benares and Ricardo S. Santos, Jr., for violation of Batas Pambansa Blg. 22 docketed as Criminal Case No. Q-14867 of then Court of First Instance of Rizal, Quezon City.

Meanwhile, during the preliminary investigation of the criminal charge against Benares and the plaintiff herein, before Assistant City Fiscal Alfonso T. Llamas, plaintiff Ricardo S. Santos, Jr. tendered cashier's check No. CC 160152 for P45,000.00 dated April 10, 1981 to the defendant Ernestina Crisologo-Jose, the complainant in that criminal case. The defendant refused to receive the cashier's check in payment of the dishonored check in the amount of P45,000.00. Hence, plaintiff encashed the aforesaid cashier's check and subsequently deposited said amount of P45,000.00 with the Clerk of Court on August 14, 1981 (Exhs. 'D' and 'E'). Incidentally, the cashier's check adverted to above was purchased by Atty. Oscar Z. Benares and given to the plaintiff herein to be applied in payment of the dishonored check. 3

After trial, the court a quo, holding that it was "not persuaded to believe that consignation referred to in Article 1256 of the Civil Code is applicable to this case," rendered judgment dismissing plain-tiff s complaint and defendant's counterclaim. 4

As earlier stated, respondent court reversed and set aside said judgment of dismissal and revived the complaint for consignation, directing the trial court to give due course thereto.

Hence, the instant petition, the assignment of errors wherein are prefatorily stated and discussed se-riatim.

1. Petitioner contends that respondent Court of Appeals erred in holding that private respondent, one of the signatories of the check issued under the account of Mover Enterprises, Inc., is an accommodation party under the Negotiable In-struments Law and a debtor of petitioner to the extent of the amount of said check.

Petitioner avers that the accommodation party in this case is Mover Enterprises, Inc. and not private respondent who merely signed the check in question in a representative capacity, that is, as vice-president of said corporation, hence he is not liable thereon under the Negotiable Instruments Law.

The pertinent provision of said law referred to provides:

Sec. 29. Liability of accommodation party an accommodation party is one who has signed the instrument as maker, drawer, acceptor, or indorser, without re-ceiving 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, notwith-standing such holder, at the time of taking the instrument, knew him to be only an accommodation party.

Consequently, to be considered an accommodation party, a person must (1) be a party to the instru -ment, signing as maker, drawer, acceptor, or indorser, (2) not receive value therefor, and (3) sign for the purpose of lending his name for the credit of some other person.

Based on the foregoing requisites, it is not a valid defense that the accommodation party did not re-ceive any valuable consideration when he executed the instrument. From the standpoint of contract law, he differs from the ordinary concept of a debtor therein in the sense that he has not received

any valuable consideration for the instrument he signs. Nevertheless, he is liable to a holder for value as if the contract was not for accommodation 5in whatever capacity such accommodation party signed the instrument, whether primarily or secondarily. Thus, it has been held that in lending his name to the accommodated party, the accommodation party is in effect a surety for the latter. 6

Assuming arguendo that Mover Enterprises, Inc. is the accommodation party in this case, as peti-tioner suggests, the inevitable question is whether or not it may be held liable on the accommoda-tion instrument, that is, the check issued in favor of herein petitioner.

We hold in the negative.

The aforequoted provision of the Negotiable Instruments Law which holds an accommodation party liable on the instrument to a holder for value, although such holder at the time of taking the instrument knew him to be only an accommodation party, does not include nor apply to corpora-tions which are accommodation parties. 7 This is because the issue or indorsement of negotiable paper by a corporation without consideration and for the accommodation of another is  ultra vires. 8 Hence, one who has taken the instrument with knowledge of the accommodation nature thereof cannot recover against a corporation where it is only an accommodation party. If the form of the instrument, or the nature of the transaction, is such as to charge the indorsee with knowledge that the issue or indorsement of the instrument by the corporation is for the accommodation of an-other, he cannot recover against the corporation thereon. 9

By way of exception, an officer or agent of a corporation shall have the power to execute or indorse a negotiable paper in the name of the corporation for the accommodation of a third person only if specifically authorized to do so. 10 Corollarily, corporate officers, such as the president and vice-president, have no power to execute for mere accommodation a negotiable instrument of the corpo-ration for their individual debts or transactions arising from or in relation to matters in which the corporation has no legitimate concern. Since such accommodation paper cannot thus be enforced against the corporation, especially since it is not involved in any aspect of the corporate business or operations, the inescapable conclusion in law and in logic is that the signatories thereof shall be personally liable therefor, as well as the consequences arising from their acts in connection there-with.

The instant case falls squarely within the purview of the aforesaid decisional rules. If we indulge petitioner in her aforesaid postulation, then she is effectively barred from recovering from Mover Enterprises, Inc. the value of the check. Be that as it may, petitioner is not without recourse.

The fact that for lack of capacity the corporation is not bound by an accommodation paper does not thereby absolve, but should render personally liable, the signatories of said instrument where the facts show that the accommodation involved was for their personal account, undertaking or purpose and the creditor was aware thereof.

Petitioner, as hereinbefore explained, was evidently charged with the knowledge that the cheek was issued at the instance and for the personal account of Atty. Benares who merely prevailed upon re-spondent Santos to act as co-signatory in accordance with the arrangement of the corporation with its depository bank. That it was a personal undertaking of said corporate officers was apparent to petitioner by reason of her personal involvement in the financial arrangement and the fact that, while it was the corporation's check which was issued to her for the amount involved, she actually had no transaction directly with said corporation.

There should be no legal obstacle, therefore, to petitioner's claims being directed personally against Atty. Oscar Z. Benares and respondent Ricardo S. Santos, Jr., president and vice-president, respec-tively, of Mover Enterprises, Inc.

2. On her second assignment of error, petitioner argues that the Court of Ap-peals erred in holding that the consignation of the sum of P45,000.00, made by private respondent after his tender of payment was refused by petitioner, was proper under Article 1256 of the Civil Code.

Petitioner's submission is that no creditor-debtor relationship exists between the parties, hence consignation is not proper. Concomitantly, this argument was premised on the assumption that pri -vate respondent Santos is not an accommodation party.

As previously discussed, however, respondent Santos is an accommodation party and is, therefore, liable for the value of the check. The fact that he was only a co-signatory does not detract from his personal liability. A co-maker or co-drawer under the circumstances in this case is as much an ac-commodation party as the other co-signatory or, for that matter, as a lone signatory in an accommo-dation instrument. Under the doctrine in Philippine Bank of Commerce vs. Aruego, supra, he is in effect a co-surety for the accommodated party with whom he and his co-signatory, as the other co-surety, assume solidary liability ex lege for the debt involved. With the dishonor of the check, there was created a debtor-creditor relationship, as between Atty. Benares and respondent Santos, on the one hand, and petitioner, on the other. This circumstance enables respondent Santos to resort to an action of consignation where his tender of payment had been refused by petitioner.

We interpose the caveat, however, that by holding that the remedy of consignation is proper under the given circumstances, we do not thereby rule that all the operative facts for consignation which would produce the effect of payment are present in this case. Those are factual issues that are not clear in the records before us and which are for the Regional Trial Court of Quezon City to ascer -tain in Civil Case No. Q-33160, for which reason it has advisedly been directed by respondent court to give due course to the complaint for consignation, and which would be subject to such issues or claims as may be raised by defendant and the counterclaim filed therein which is hereby ordered similarly revived.

3. That respondent court virtually prejudged Criminal Case No. Q-14687 of the Regional Trial Court of Quezon City filed against private respondent for viola-tion of Batas Pambansa Blg. 22, by holding that no criminal liability had yet at-tached to private respondent when he deposited with the court the amount of P45,000.00 is the final plaint of petitioner.

We sustain petitioner on this score.

Indeed, respondent court went beyond the ratiocination called for in the appeal to it in CA-G.R. CV. No. 05464. In its own decision therein, it declared that "(t)he lone issue dwells in the question of whether an accommodation party can validly consign the amount of the debt due with the court af -ter his tender of payment was refused by the creditor." Yet, from the commercial and civil law as-pects determinative of said issue, it digressed into the merits of the aforesaid Criminal Case No. Q-14867, thus:

Section 2 of B.P. 22 establishes the prima facie evidence of knowledge of such insufficiency of funds or credit. Thus, the making, drawing and issuance of a check, payment of which is refused by the drawee because of insufficient funds in or credit with such bank is prima facie evidence of knowledge of insuffi-ciency of funds or credit, when the check is presented within 90 days from the date of the check.

It will be noted that the last part of Section 2 of B.P. 22 provides that the ele-ment of knowledge of insufficiency of funds or credit is not present and, there-fore, the crime does not exist, when the drawer pays the holder the amount due or makes arrangements for payment in full by the drawee of such check within

five (5) banking days after receiving notice that such check has not been paid by the drawee.

Based on the foregoing consideration, this Court finds that the plaintiff-appel-lant acted within Ms legal rights when he consigned the amount of P45,000.00 on August 14, 1981, between August 7, 1981, the date when plaintiff-appellant receive (sic) the notice of non-payment, and August 14, 1981, the date when the debt due was deposited with the Clerk of Court (a Saturday and a Sunday which are not banking days) intervened. The fifth banking day fell on August 14, 1981. Hence, no criminal liability has yet attached to plaintiff-appellant when he deposited the amount of P45,000.00 with the Court a quo on August 14, 1981. 11

That said observations made in the civil case at bar and the intrusion into the merits of the criminal case pending in another court are improper do not have to be belabored. In the latter case, the crimi-nal trial court has to grapple with such factual issues as, for instance, whether or not the period of five banking days had expired, in the process determining whether notice of dishonor should be reckoned from any prior notice if any has been given or from receipt by private respondents of the subpoena therein with supporting affidavits, if any, or from the first day of actual preliminary inves-tigation; and whether there was a justification for not making the requisite arrangements for pay-ment in full of such check by the drawee bank within the said period. These are matters alien to the present controversy on tender and consignation of payment, where no such period and its legal ef-fects are involved.

These are aside from the considerations that the disputed period involved in the criminal case is only a presumptive rule, juris tantum at that, to determine whether or not there was knowledge of insufficiency of funds in or credit with the drawee bank; that payment of civil liability is not a mode for extinguishment of criminal liability; and that the requisite quantum of evidence in the two types of cases are not the same.

To repeat, the foregoing matters are properly addressed to the trial court in Criminal Case No. Q-14867, the resolution of which should not be interfered with by respondent Court of Appeals at the present posture of said case, much less preempted by the inappropriate and unnecessary holdings in the aforequoted portion of the decision of said respondent court. Consequently, we modify the deci-sion of respondent court in CA-G.R. CV No. 05464 by setting aside and declaring without force and effect its pronouncements and findings insofar as the merits of Criminal Case No. Q-14867 and the liability of the accused therein are concerned.

WHEREFORE, subject to the aforesaid modifications, the judgment of respondent Court of Ap-peals is AFFIRMED.

SO ORDERED.

Paras, Padilla and Sarmiento, JJ., concur.

Melencio-Herrera J., took no part.

G.R. No. L-56169 June 26, 1992

TRAVEL-ON, INC., petitioner, vs.COURT OF APPEALS and ARTURO S. MIRANDA, respondents.

R E S O L U T I O N

 

FELICIANO, J.:

Petitioner Travel-On. Inc. ("Travel-On") is a travel agency selling airline tickets on commission ba-sis for and in behalf of different airline companies. Private respondent Arturo S. Miranda had a re -volving credit line with petitioner. He procured tickets from petitioner on behalf of airline passen-gers and derived commissions therefrom.

On 14 June 1972, Travel-On filed suit before the Court of First Instance ("CFI") of Manila to col-lect on six (6) checks issued by private respondent with a total face amount of P115,000.00. The complaint, with a prayer for the issuance of a writ of preliminary attachment and attorney's fees, averred that from 5 August 1969 to 16 January 1970, petitioner sold and delivered various airline tickets to respondent at a total price of P278,201.57; that to settle said account, private respondent paid various amounts in cash and in kind, and thereafter issued six (6) postdated checks amounting to P115,000.00 which were all dishonored by the drawee banks. Travel-On further alleged that in March 1972, private respondent made another payment of P10,000.00 reducing his indebtedness to P105,000.00. The writ of attachment was granted by the court a quo.

In his answer, private respondent admitted having had transactions with Travel-On during the pe-riod stipulated in the complaint. Private respondent, however, claimed that he had already fully paid and even overpaid his obligations and that refunds were in fact due to him. He argued that he had issued the postdated checks for purposes of accommodation, as he had in the past accorded similar favors to petitioner. During the proceedings, private respondent contested several tickets alleged to have been erroneously debited to his account. He claimed reimbursement of his alleged over pay-ments, plus litigation expenses, and exemplary and moral damages by reason of the allegedly im-proper attachment of his properties.

In support of his theory that the checks were issued for accommodation, private respondent testified that he bad issued the checks in the name of Travel-On in order that its General Manager, Elita Montilla, could show to Travel-On's Board of Directors that the accounts receivable of the com-pany were still good. He further stated that Elita Montilla tried to encash the same, but that these were dishonored and were subsequently returned to him after the accommodation purpose had been attained.

Travel-On's witness, Elita Montilla, on the other hand explained that the "accommodation" ex-tended to Travel-On by private respondent related to situations where one or more of its passengers needed money in Hongkong, and upon request of Travel-On respondent would contact his friends in Hongkong to advance Hongkong money to the passenger. The passenger then paid Travel-On upon his return to Manila and which payment would be credited by Travel-On to respondent's run-ning account with it.

In its decision dated 31 January 1975, the court a quo ordered Travel-On to pay private respondent the amount of P8,894.91 representing net overpayments by private respondent, moral damages of P10,000.00 for the wrongful issuance of the writ of attachment and for the filing of this case, P5,000.00 for attorney's fees and the costs of the suit.

The trial court ruled that private respondent's indebtedness to petitioner was not satisfactorily estab-lished and that the postdated checks were issued not for the purpose of encashment to pay his in-debtedness but to accommodate the General Manager of Travel-On to enable her to show to the Board of Directors that Travel-On was financially stable.

Petitioner filed a motion for reconsideration that was, however, denied by the trial court, which in fact then increased the award of moral damages to P50,000.00.

On appeal, the Court of Appeals affirmed the decision of the trial court, but reduced the award of moral damages to P20,000.00, with interest at the legal rate from the date of the filing of the An -swer on 28 August 1972.

Petitioner moved for reconsideration of the Court of Appeal's' decision, without success.

In the instant Petition for Review, it is urged that the postdated checks are per se evidence of liabil-ity on the part of private respondent. Petitioner further argues that even assuming that the checks were for accommodation, private respondent is still liable thereunder considering that petitioner is a holder for value.

Both the trial and appellate courts had rejected the checks as evidence of indebtedness on the ground that the various statements of account prepared by petitioner did not show that Private re -spondent had an outstanding balance of P115,000.00 which is the total amount of the checks he is -sued. It was pointed out that while the various exhibits of petitioner showed various accountabili-ties of private respondent, they did not satisfactorily establish the amount of the outstanding indebt-edness of private respondent. The appellate court made much of the fact that the figures represent-ing private respondent's unpaid accounts found in the "Schedule of Outstanding Account" dated 31 January 1970 did not tally with the figures found in the statement which showed private respon-dent's transactions with petitioner for the years 1969 and 1970; that there was no satisfactory expla-nation as to why the total outstanding amount of P278,432.74 was still used as basis in the account-ing of 7 April 1972 considering that according to the table of transactions for the year 1969 and 1970, the total unpaid account of private respondent amounted to P239,794.57.

We have, however, examined the record and it shows that the 7 April 1972 Statement of Account had simply not been updated; that if we use as basis the figure as of 31 January 1970 which is P278,432.74 and from it deduct P38,638.17 which represents some of the payments subsequently made by private respondent, the figure — P239,794.57 will be obtained.

Also, the fact alone that the various statements of account had variances in figures, simply did not mean that private respondent had no more financial obligations to petitioner. It must be stressed that private respondent's account with petitioner was a running or open one, which explains the varying figures in each of the statements rendered as of a given date.

The appellate court erred in considering only the statements of account in determining whether pri -vate respondent was indebted to petitioner under the checks. By doing so, it failed to give due im-portance to the most telling piece of evidence of private respondent's indebtedness — the checks themselves which he had issued.

Contrary to the view held by the Court of Appeals, this Court finds that the checks are the all im -portant evidence of petitioner's case; that these checks clearly established private respondent's in-debtedness to petitioner; that private respondent was liable thereunder.

It is important to stress that a check which is regular on its face is deemed prima facie to have been issued for a valuable consideration and every person whose signature appears thereon is deemed to have become a party thereto for value. 1 Thus, the mere introduction of the instrument sued on in evidence prima facie entitles the plaintiff to recovery. Further, the rule is quite settled that a nego-tiable instrument is presumed to have been given or indorsed for a sufficient consideration unless otherwise contradicted and overcome by other competent evidence. 2

In the case at bar, the Court of Appeals, contrary to these established rules, placed the burden of proving the existence of valuable consideration upon petitioner. This cannot be countenanced; it was up to private respondent to show that he had indeed issued the checks without sufficient con-sideration. The Court considers that Private respondent was unable to rebut satisfactorily this legal

presumption. It must also be noted that those checks were issued immediately after a letter demand-ing payment had been sent to private respondent by petitioner Travel-On.

The fact that all the checks issued by private respondent to petitioner were presented for payment by the latter would lead to no other conclusion than that these checks were intended for encash-ment. There is nothing in the checks themselves (or in any other document for that matter) that states otherwise.

We are unable to accept the Court of Appeals' conclusion that the checks here involved were issued for "accommodation" and that accordingly private respondent maker of those checks was not liable thereon to petitioner payee of those checks.

In the first place, while the Negotiable Instruments Law does refer to accommodation transactions, no such transaction was here shown. Section 29 of the Negotiable Instruments Law provides as fol -lows:

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, notwith-standing such holder, at the time of taking the instrument, knew him to be only an accommodation party.

In accommodation transactions recognized by the Negotiable Instruments Law, an accom-modating party lends his credit to the accommodated party, by issuing or indorsing a check which is held by a payee or indorsee as a holder in due course, who gave full value therefor to the accommodated party. The latter, in other words, receives or realizes full value which the accommodated party then must repay to the accommodating party, unless of course the accommodating party intended to make a donation to the accommodated party. But the accommodating party is bound on the check to the holder in due course who is necessarily a third party and is not the accommodated party. Having issued or in-dorsed the check, the accommodating party has warranted to the holder in due course that he will pay the same according to its tenor. 3

In the case at bar, Travel-On was payee of all six (6) checks, it presented these checks for payment at the drawee bank but the checks bounced. Travel-On obviously was not an accommodated party; it realized no value on the checks which bounced.

Travel-On was entitled to the benefit of the statutory presumption that it was a holder in due course, 4 that the checks were supported by valuable consideration. 5 Private respondent maker of the checks did not successfully rebut these presumptions. The only evidence aliunde that private re-spondent offered was his own self-serving uncorroborated testimony. He claimed that he had issued the checks to Travel-On as payee to "accommodate" its General Manager who allegedly wished to show those checks to the Board of Directors of Travel-On to "prove" that Travel-On's account re-ceivables were somehow "still good." It will be seen that this claim was in fact a claim that the checks were merely simulated, that private respondent did not intend to bind himself thereon. Only evidence of the clearest and most convincing kind will suffice for that purpose; 6 no such evidence was submitted by private respondent. The latter's explanation was denied by Travel-On's General Manager; that explanation, in any case, appears merely contrived and quite hollow to us. Upon the other hand, the "accommodation" or assistance extended to Travel-On's passengers abroad as testi-fied by petitioner's General Manager involved, not the accommodation transactions recognized by the NIL, but rather the circumvention of then existing foreign exchange regulations by passengers booked by Travel-On, which incidentally involved receipt of full consideration by private respon-dent.

Thus, we believe and so hold that private respondent must be held liable on the six (6) checks here involved. Those checks in themselves constituted evidence of indebtedness of private respondent, evidence not successfully overturned or rebutted by private respondent.

Since the checks constitute the best evidence of private respondent's liability to petitioner Travel-On, the amount of such liability is the face amount of the checks, reduced only by the P10,000.00 which Travel-On admitted in its complaint to have been paid by private respondent sometime in March 1992.

The award of moral damages to Private respondent must be set aside, for the reason that Petitioner's application for the writ of attachment rested on sufficient basis and no bad faith was shown on the part of Travel-On. If anyone was in bad faith, it was private respondent who issued bad checks and then pretended to have "accommodated" petitioner's General Manager by assisting her in a sup-posed scheme to deceive petitioner's Board of Directors and to misrepresent Travel-On's financial condition.

ACCORDINGLY, the Court Resolved to GRANT due course to the Petition for Review on Certio-rari and to REVERSE and SET ASIDE the Decision dated 22 October 1980 and the Resolution of 23 January 1981 of the Court of Appeals, as well as the Decision dated 31 January 1975 of the trial court, and to enter a new decision requiring private respondent Arturo S. Miranda to pay to peti -tioner Travel-On the amount of P105,000.00 with legal interest thereon from 14 June 1972, plus ten percent (10%) of the total amount due as attorney's fees. Costs against Private respondent.

Gutierrez, Jr., Bidin, Davide, Jr. and Romero, JJ., concur.

G.R. No. 108120 January 26, 1994

THE COMMISSION ON ELECTIONS AND SIXTO B. DELA VICTORIA, petitioners, vs.THE COURT OF APPEALS, THE OFFICE OF THE SOLICITOR GENERAL, and CON-GRESSMAN CARMELO J. LOCSIN, respondents.

Froilan R. Montalban, Sr. for petitioner Sixto B. Dela Victoria.

Escalon Law Office for private respondent.

 

QUIASON, J.:

This is an appeal by certiorari to set aside the Decision of the Court of Appeals in CA-G.R. SP No. 26047, ordering the dismissal of Criminal Case No. B-1588 against respondent Carmelo J. Locsin pending before the Regional Trial Court, Branch XIV, Baybay, Leyte.

I

Petitioner Sixto B. dela Victoria was a candidate at the February 1, 1988 special elections for Mayor of Albuera, Leyte. He lost the mayoralty election to Genoveva Mesina, who belonged to the same political party as respondent Camilo J. Locsin's, the duly elected Congressman of the Fourth District of Leyte.

On February 8, 1990, an information was filed by the Commission on Elections before the Re-gional Trial Court, Branch XIV, Baybay, Leyte (Criminal Case N. B-1588), charging respondent Locsin with violation of Section 261 (f) of the Omnibus Election Code of the Philippines (B.P. Blg. 881). Respondent Locsin was accused of intimidating the members of the Municipal Board of Can-vassers of Albuera, Leyte during the canvassing of election returns in said province and preventing them from performing their functions and duties.

When arraigned, respondent Locsin entered a plea of not guilty and trial commenced accordingly.

After the prosecution had rested its case, respondent Locsin filed a Demurrer to Evidence, claiming that the prosecution failed to adduce the sufficient evidence to prove his guilt. The prosecution filed its Comment and Opposition thereto.

In an order dated August 9, 1991, the trial court denied the demurrer and calendared the reception of evidence for respondent Locsin.

On September 23, 1991, respondent Locsin, alleging grave abuse of discretion on the part of the trial court in denying his demurrer to evidence, filed with the Court of Appeals a petition for certio-rari and prohibition to set aside the Order dated August 9, 1991 of the trial court (CA-G.R. SP No. 26047).

As ordered by the Court of Appeals, the Solicitor General filed his comment to the petition. Instead of praying for the dismissal of the petition, the Solicitor general recommended that the criminal case against respondent Locsin be dismissed since the prosecution "utterly failed to come up with even a single iota of evidence which would positively or remotely link petitioner to any coercive act charged under the Information" (Rollo, p. 85).

The Solicitor General pointed out that:

(1) The Chairman and Secretary of the Municipal Board of Canvassers whom the prosecution claimed were the ones whose official functions were obstructed by the acts of coercion And intimidation of private respondent, denied that the latter had committed such acts of coercion and intimidation.

(2) Petitioner Dela Victoria and his companions were able to take photographs of the canvassing, freely and without obstruction from anyone. Petitioner admit-ted that he and his photographer were never prevented from taking pictures of canvassing.

(3) The minutes of the canvassing did not indicate any untoward incident taking place.

(4) Petitioner admitted that he saw private respondent when the latter was at the Office of the Election Register. The canvassing was done at the session hall of the municipal building.

(5) There is no basis for the trial court's conclusion that private respondent was responsible for the presence of soldiers in the municipal building. The trial court's conclusions that private respondent had something to do with the send-ing of the soldiers because they arrived at the municipal building about the same time is tenuous and conjectured.

(6) The police blotter (Exh. R) had entries stating that the soldiers were sent to the municipal building to observe the peace and order and some of the soldiers were even tasked by the COMELEC Register to perform some election chores (Rollo, pp. 85-90).

On May 7, 1992, the Court of Appeals granted the petition for certiorari, disposing as follows:

WHEREFORE, in view of the foregoing, the Petition is hereby GRANTED dis-missing Criminal Case No. B-1588 and the Order dated August 9, 1991 issued by the respondent Judge is ANNULLED without pronouncement as to costs.

SO ORDERED.

Hence, this petition.

II

The instant petition was filed by petitioners under Rule 65 of the Revised Rules of Court, alleging grave abuse of discretion amounting to lack of jurisdiction on the part of the Court of Appeals in granting the petition for certiorari. The judgment, being final and on the merits, the remedy there-from provided by the Rules of Court is an appeal under Rule 45. However, so as to avoid dismiss-ing the petition on a technicality, we can and we shall treat the petition as an appeal under Rule 45 (Tesorero v. Mathay, 185 SCRA 124 [1990]; Mathay v. Melicor, 181 SCRA 811 [1990]; Elks Club v. Rovira, 80 Phil. 272 [1948]).

Respondents Locsin and the Solicitor general separately contend : (i) that the COMELEC and peti-tioner Dela Victoria have no personality nor authority to file the instant petition; and (ii) that its fil-ing places respondent Locsin in double jeopardy.

According to respondent Locsin, considering that the criminal action that was ordered dismissed by the Court of Appeals in the name of the People of the Philippines, only the Solicitor General can file the instant petition.

Private respondent finds comfort from Republic v. Partisala, 118 SCRA 370 (1982) and City Fiscal of Tacloban v.Espina, 166 SCRA 614 (1988), where we held that only the Solicitor General may bring or defend actions on behalf of the Republic of the Philippines, or represent the People in criminal proceedings pending in this Court or the Court of Appeals.

However, in a subsequent case, that of People v. Calo, 186 SCRA 620 (1990) we relaxed the rule laid down inPartisala and Espina, and allowed the complainant to file the petition for certio-rari and prohibition to annul an order of the respondent judge, admitting the accused to bail in a murder case, without any hearing having been conducted on the bail petition. We noted that "the ends of substantial justice would be better served, and the issues in this case could be determined in a more just, speedy and inexpensive manner, by entertaining the petition at bar. As an offended party in a criminal case, private petitioner has sufficient personality and a valid grievance against Judge Adao's order granting bail to the alleged murderers of his (private respondent's) father."

In view of the peculiar circumstances of the case at bench, where the Solicitor general chose to take side with the accused in the election case being prosecuted by the COMELEC, it is but proper to extend the ruling in Calo to such a government agency entrusted with the prosecution of criminal cases. It is likewise appropriate to recognize its right to file special civil actions before the appellate courts in cases where the Solicitor General assumes a position antagonistic to that of said agency.

The COMELEC has sufficient interest in filing the petition to set aside the decision of the Court of Appeals having sustained the demurrer to evidence in the criminal case against private respondent for violation of the Election Laws. This is so, for it is not only entrusted with the duty to enforce the said law but also to prosecute all election offenses.

Under the Constitution, the COMELEC has the power to "prosecute cases of violations of election laws, including acts or omissions constituting election frauds, offenses, and malpractices" (Art. IX [C], Sec. 2 [6]), and under the Omnibus Election Code, (BP Blg. 881), it may avail of the assistance of other prosecution arms of the government (Sec. 265). Thus, the COMELEC Rules of Procedure gave the Chief State, Provincial and City Prosecutors a continuing authority "as deputies" to prose-cute offenses punishable under the election laws (COMELEC Rules of Procedure, Part 12, Rule 34, Sec. 2).

We have allowed government agencies to handle their cases before appellate courts, to the exclu-sion of the Solicitor General. In Development Bank of the Philippines v. Pundogar, 218 SCRA 118 (1993), we held:

Government agencies, including government corporations, must look at the So-licitor General in the first instance, to represent them in legal proceedings. However, in much the same way that the Solicitor General is not absolutely re-quired to represent a government agency, neither is the latter absolutely com-pelled to avail of the Solicitor General's services. A justifiable departure from the general rule is when the agency has lost confidence in the Solicitor general, as demonstrated by its past actuations exemplified in the instant case where the DBP would rather rely on its 'in house' resources for legal services.

On their part, petitioners question the dismissal of the criminal case against respondent Locsin by the Court of Appeals.

Demurrer to evidence is governed by Section 15, Rule 119 of the 1985 Rules on Criminal Proce-dure, which reads as follows:

After the prosecution has rested its case, the court may dismiss the case on the ground of insufficiency of evidence: (1) on its own initiative after giving the prosecution an opportunity to be heard; and (2) on motion of the accused filled with prior leave of court.

If the court denies the motion for dismissal, the accused may adduce evidence in his defense. When the accused files such motion to dismiss without express leave of court, he waives the right to present evidence and submits the case for judgment on the basis of the evidence for the prosecution.

After the prosecution has rested its case in a criminal action, the court, motu proprio, or on motion of the accused with prior leave of court, may dismiss the case against the accused on the ground of insufficiency of evidence.

If the accused moves for the dismissal with prior leave of court, and the court denies the same, the accused may present evidence to substantiate his defense. If he, however, fails to secure leave of court and the demurrer to evidence is denied, he is deemed to have waived his right to present evi -dence and consequently submits the case for judgment on the basis of the evidence for the prosecu-tion.

The granting of the demurrer to evidence by the court produces a different effect altogether. The case is ordered dismissed, and the order of dismissal being on the merits, is equivalent to an acquit -tal from which the prosecution cannot appeal, as it would place the accused in double jeopardy (People v. City Court of Silay, 74 SCRA 247 [1976]).

The Court of Appeals upheld the Solicitor General's recommendation to dismiss Criminal Case No. B-1588 on the ground of insufficiency of evidence.

In so doing, the Court of Appeals reviewed the evidence of the prosecution and found it insufficient to sustain a finding of guilt on the part of the accused. Hence, the Court of Appeals concluded:

As such, when respondent Judge denied the petitioner's demurrer to evidence, he committed grave abuse of discretion for failing to consider the testimonies of the witnesses presented, thus certiorarilies against him.

Being a decision on the merits, this dismissal amounts to an acquittal of the accused from the of-fense charged.

We are bound by the dictum that whatever error may have been committed effecting the dismissal of the case, this cannot now be corrected because of the timely plea of double jeopardy (People v. Francisco, 128 SCRA 110 [1984]; People v. City Court of Silay, supra; City Fiscal of Cebu v. Kin-tanar, 32 SCRA 601 [1970]; People v. Nieto, 103 Phil. 1133 [1958]).

Double jeopardy attaches when the accused, charged in a valid complaint or information before a competent court, is acquitted or convicted or the case is unconditionally dismissed without his ex-press consent after he has been arraigned and entered a plea (1985 Rules on Criminal Procedure, Rule 117, Sec. 7; People v. Quizada, 160 SCRA 517 [1988]; People v. Bocar, 138 SCRA 166 [1985]).

Nevertheless, even if the motion to dismiss the case is made with his consent or by the accused himself, double jeopardy may be attached in two instances: (i) when the ground is insufficiency of the evidence for the prosecution, and (ii) when the proceedings have been prolonged unreasonably, in violation of the accused's right to speedy trial (People v. Gines, 197 SCRA 481 [1991]; People v. Declaro, 170 SCRA 142 [1989]; People v. Acosta, 25 SCRA 823 [1968]).

Petitioners claim that there was collusion between respondent Locsin and the Solicitor general as shown by the latter's act of abandoning his legal duty to defend the government and its officials be-fore the courts.

We do not find any impropriety on the part of the Solicitor General in recommending the dismissal of the case. As the official in control of criminal cases before the appellate courts, he may abandon or discontinue the prosecution of the case in the exercise of his sound discretion (Calderon v. Solic-itor General, 215 SCRA 876 [1992]; Gonzales v. Chavez, 205 SCRA 816 [1992]).

WHEREFORE, the petition is DISMISSED.

SO ORDERED.

Narvasa, C.J., Cruz, Feliciano, Padilla, Bidin, Regalado, Davide, Jr., Romero, Bellosillo, Melo, Puno, Vitug and Kapunan, JJ., concur.

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 IN-DUSTRIAL PLASTIC CORPORATION and PRODUCERS BANK OF THE PHILIP-PINES, defendants-respondents.

Yngson & Associates for petitioner.

Henry A. Reyes & Associates for Samso Tung & Asian Industrial Plastic Corporation.

Eduardo G. Castelo for Sima Wei.

Monsod, Tamargo & Associates for Producers Bank.

Rafael S. Santayana for Mary Cheng Uy.

 

CAMPOS, JR., J.:

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 peti -tioner, 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, repre-sented 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 PLAIN-TIFF-PETITIONER HAS NO CAUSE OF ACTION AGAINST DEFEN-DANTS-RESPONDENTS HEREIN.

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

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 Cor-poration, 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 peti -tioner-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, Presi-dent of Plastic Corporation, that the transaction was legal and regular, instructed the cashier of Pro-ducers Bank to accept the checks for deposit and to credit them to the account of said Plastic Cor-poration, 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 obliga-tion 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 rec -ognized the business custom of using printed checks where blanks are provided for the date of is-suance, 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 Ne-gotiable Instruments Law, which governs checks, provides in part:

Every contract on a negotiable instrument is incomplete and revocable until de-livery 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. 3Delivery of an instrument means transfer of possession, actual or constructive, from one person to another. 4Without 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 or-ders 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 li-ability to petitioner Bank under the loan evidenced by the promissory note agreed to by her. Her al-legation 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 re-spondent 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 bal-ance 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 respon-dents, 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 peti-tioner Bank. It had no right or interest in the checks which could have been violated by said respon-dents. 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 com-plaint is AFFIRMED insofar as the second cause of action is concerned. On the first cause of ac-tion, the case is REMANDED to the trial court for a trial on the merits, consistent with this deci -sion, 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.

Narvasa, C.J., Padilla, Regalado and Nocon, JJ., concur.

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

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

 

FERNANDEZ, J.:

The defendant, Jose M. Aruego, appealed to the Court of Appeals from the order of the Court of First Instance of Manila, Branch XIII, in Civil Case No. 42066 denying his motion to set aside the order declaring him in default, 1and from the order of said court in the same case denying his mo-tion to set aside the judgment rendered after he was declared in default. 2 These two appeals of the defendant were docketed as CA-G.R. NO. 27734-R and CA-G.R. NO. 27940-R, respectively.

Upon motion of the defendant on July 25, 1960, 3 he was allowed by the Court of Appeals to file one consolidated record on appeal of CA-G.R. NO. 27734-R and CA-G.R. NO. 27940-R. 4

In a resolution promulgated on March 1, 1966, the Court of Appeals, First Division, certified the consolidated appeal to the Supreme Court on the ground that only questions of law are involved. 5

On December 1, 1959, the Philippine Bank of Commerce instituted against Jose M. Aruego Civil Case No. 42066 for the recovery of the total sum of about P35,000.00 with daily interest thereon from November 17, 1959 until fully paid and commission equivalent to 3/8% for every thirty (30) days or fraction thereof plus attorney's fees equivalent to 10% of the total amount due and costs. 6 The complaint filed by the Philippine Bank of Commerce contains twenty-two (22) causes of action referring to twenty-two (22) transactions entered into by the said Bank and Aruego on dif-ferent dates covering the period from August 28, 1950 to March 14, 1951. 7 The sum sought to be recovered represents the cost of the printing of "World Current Events," a periodical published by the defendant. To facilitate the payment of the printing the defendant obtained a credit accommoda-tion from the plaintiff. Thus, for every printing of the "World Current Events," the printer, Encal Press and Photo Engraving, collected the cost of printing by drawing a draft against the plaintiff, said draft being sent later to the defendant for acceptance. As an added security for the payment of the amounts advanced to Encal Press and Photo-Engraving, the plaintiff bank also required defen-dant Aruego to execute a trust receipt in favor of said bank wherein said defendant undertook to hold in trust for plaintiff the periodicals and to sell the same with the promise to turn over to the plaintiff the proceeds of the sale of said publication to answer for the payment of all obligations arising from the draft. 8

Aruego received a copy of the complaint together with the summons on December 2, 1959. 9 On December 14, 1959 defendant filed an urgent motion for extension of time to plead, and set the hearing on December 16, 1959.10 At the hearing, the court denied defendant's motion for exten-sion. Whereupon, the defendant filed a motion to dismiss the complaint on December 17, 1959 on the ground that the complaint states no cause of action because:

a) When the various bills of exchange were presented to the defendant as drawee for acceptance, the amounts thereof had already been paid by the plaintiff to the drawer (Encal Press and Photo En-graving), without knowledge or consent of the defendant drawee.

b) In the case of a bill of exchange, like those involved in the case at bar, the defendant drawee is an accommodating party only for the drawer (Encal Press and Photo-Engraving) and win be liable in the event that the accommodating party (drawer) fails to pay its obligation to the plaintiff. 11

The complaint was dismissed in an order dated December 22, 1959, copy of which was received by the defendant on December 24, 1959. 12

On January 13, 1960, the plaintiff filed a motion for reconsideration. 13 On March 7, 1960, acting upon the motion for reconsideration filed by the plaintiff, the trial court set aside its order dismiss -ing the complaint and set the case for hearing on March 15, 1960 at 8:00 in the morning. 14 A copy of the order setting aside the order of dismissal was received by the defendant on March 11, 1960 at 5:00 o'clock in the afternoon according to the affidavit of the deputy sheriff of Manila, Mamerto de la Cruz. On the following day, March 12, 1960, the defendant filed a motion to postpone the trial of the case on the ground that there having been no answer as yet, the issues had not yet been joined. 15 On the same date, the defendant filed his answer to the complaint interposing the follow-ing defenses: That he signed the document upon which the plaintiff sues in his capacity as President of the Philippine Education Foundation; that his liability is only secondary; and that he believed that he was signing only as an accommodation party. 16

On March 15, 1960, the plaintiff filed an ex parte motion to declare the defendant in default on the ground that the defendant should have filed his answer on March 11, 1960. He contends that by fil -ing his answer on March 12, 1960, defendant was one day late. 17 On March 19, 1960 the trial court declared the defendant in default. 18 The defendant learned of the order declaring him in de-fault on March 21, 1960. On March 22, 1960 the defendant filed a motion to set aside the order of default alleging that although the order of the court dated March 7, 1960 was received on March 11, 1960 at 5:00 in the afternoon, it could not have been reasonably expected of the defendant to file his answer on the last day of the reglementary period, March 11, 1960, within office hours, espe-cially because the order of the court dated March 7, 1960 was brought to the attention of counsel only in the early hours of March 12, 1960. The defendant also alleged that he has a good and sub-stantial defense. Attached to the motion are the affidavits of deputy sheriff Mamerto de la Cruz that he served the order of the court dated March 7, 1960 on March 11, 1960, at 5:00 o'clock in the af -ternoon and the affidavit of the defendant Aruego that he has a good and substantial de-fense. 19 The trial court denied the defendant's motion on March 25, 1960. 20 On May 6, 1960, the trial court rendered judgment sentencing the defendant to pay to the plaintiff the sum of P35,444.35 representing the total amount of his obligation to the said plaintiff under the twenty-two (22) causes of action alleged in the complaint as of November 15, 1957 and the sum of P10,000.00 as attorney's fees. 21

On May 9, 1960 the defendant filed a notice of appeal from the order dated March 25, 1961 deny-ing his motion to set aside the order declaring him in default, an appeal bond in the amount of P60.00, and his record on appeal. The plaintiff filed his opposition to the approval of defendant's record on appeal on May 13, 1960. The following day, May 14, 1960, the lower court dismissed de-fendant's appeal from the order dated March 25, 1960 denying his motion to set aside the order of default. 22 On May 19, 1960, the defendant filed a motion for reconsideration of the trial court's or-der dismissing his appeal. 23 The plaintiff, on May 20, 1960, opposed the defendant's motion for reconsideration of the order dismissing appeal. 24 On May 21, 1960, the trial court reconsidered its previous order dismissing the appeal and approved the defendant's record on appeal. 25 On May 30, 1960, the defendant received a copy of a notice from the Clerk of Court dated May 26, 1960, informing the defendant that the record on appeal filed ed by the defendant was forwarded to the Clerk of Court of Appeals. 26

On June 1, 1960 Aruego filed a motion to set aside the judgment rendered after he was declared in default reiterating the same ground previously advanced by him in his motion for relief from the or-der of default. 27 Upon opposition of the plaintiff filed on June 3, 1960, 28 the trial court denied the defendant's motion to set aside the judgment by default in an order of June 11, 1960.  29 On June 20, 1960, the defendant filed his notice of appeal from the order of the court denying his mo-tion to set aside the judgment by default, his appeal bond, and his record on appeal. The defendant's record on appeal was approved by the trial court on June 25, 1960. 30 Thus, the defendant had two appeals with the Court of Appeals: (1) Appeal from the order of the lower court denying his motion to set aside the order of default docketed as CA-G.R. NO. 27734-R; (2) Appeal from the order denying his motion to set aside the judgment by default docketed as CA-G.R. NO. 27940-R.

In his brief, the defendant-appellant assigned the following errors:

I

THE LOWER COURT ERRED IN HOLDING THAT THE DEFENDANT WAS IN DEFAULT.

II

THE LOWER COURT ERRED IN ENTERTAINING THE MOTION TO DE-CLARE DEFENDANT IN DEFAULT ALTHOUGH AT THE TIME THERE WAS ALREADY ON FILE AN ANSWER BY HIM WITHOUT FIRST DIS-POSING OF SAID ANSWER IN AN APPROPRIATE ACTION.

III

THE LOWER COURT ERRED IN DENYING DEFENDANT'S PETITION FOR RELIEF OF ORDER OF DEFAULT AND FROM JUDGMENT BY DE-FAULT AGAINST DEFENDANT. 31

It has been held that to entitle a party to relief from a judgment taken against him through his mis-take, inadvertence, surprise or excusable neglect, he must show to the court that he has a meritori-ous defense. 32 In other words, in order to set aside the order of default, the defendant must not only show that his failure to answer was due to fraud, accident, mistake or excusable negligence but also that he has a meritorious defense.

The record discloses that Aruego received a copy of the complaint together with the summons on December 2, 1960; that on December 17, 1960, the last day for filing his answer, Aruego filed a motion to dismiss; that on December 22, 1960 the lower court dismissed the complaint; that on Jan-uary 23, 1960, the plaintiff filed a motion for reconsideration and on March 7, 1960, acting upon the motion for reconsideration, the trial court issued an order setting aside the order of dismissal; that a copy of the order was received by the defendant on March 11, 1960 at 5:00 o'clock in the af-ternoon as shown in the affidavit of the deputy sheriff; and that on the following day, March 12, 1960, the defendant filed his answer to the complaint.

The failure then of the defendant to file his answer on the last day for pleading is excusable. The or-der setting aside the dismissal of the complaint was received at 5:00 o'clock in the afternoon. It was therefore impossible for him to have filed his answer on that same day because the courts then held office only up to 5:00 o'clock in the afternoon. Moreover, the defendant immediately filed his an-swer on the following day.

However, while the defendant successfully proved that his failure to answer was due to excusable negligence, he has failed to show that he has a meritorious defense. The defendant does not have a good and substantial defense.

Defendant Aruego's defenses consist of the following:

a) The defendant signed the bills of exchange referred to in the plaintiff's complaint in a representa-tive capacity, as the then President of the Philippine Education Foundation Company, publisher of "World Current Events and Decision Law Journal," printed by Encal Press and Photo-Engraving, drawer of the said bills of exchange in favor of the plaintiff bank;

b) The defendant signed these bills of exchange not as principal obligor, but as accommodation or additional party obligor, to add to the security of said plaintiff bank. The reason for this statement is that unlike real bills of exchange, where payment of the face value is advanced to the drawer only upon acceptance of the same by the drawee, in the case in question, payment for the supposed bills of exchange were made before acceptance; so that in effect, although these documents are labelled bills of exchange, legally they are not bills of exchange but mere instruments evidencing indebted-ness of the drawee who received the face value thereof, with the defendant as only additional secu-rity of the same. 33

The first defense of the defendant is that he signed the supposed bills of exchange as an agent of the Philippine Education Foundation Company where he is president. Section 20 of the Negotiable In -struments Law provides that "Where the instrument contains or a person adds to his signature words indicating that he signs for or on behalf of a principal or in a representative capacity, he is not liable on the instrument if he was duly authorized; but the mere addition of words describing him as an agent or as filing a representative character, without disclosing his principal, does not ex-empt him from personal liability."

An inspection of the drafts accepted by the defendant shows that nowhere has he disclosed that he was signing as a representative of the Philippine Education Foundation Company. 34 He merely signed as follows: "JOSE ARUEGO (Acceptor) (SGD) JOSE ARGUEGO For failure to disclose his principal, Aruego is personally liable for the drafts he accepted.

The defendant also contends that he signed the drafts only as an accommodation party and as such, should be made liable only after a showing that the drawer is incapable of paying. This contention is also without merit.

An accommodation party is one who has signed the instrument as maker, drawer, indorser, without receiving value therefor and for the purpose of lending his name to some other person. Such person is liable on the instrument to a holder for value, notwithstanding such holder, at the time of the tak -ing of the instrument knew him to be only an accommodation party. 35 In lending his name to the accommodated party, the accommodation party is in effect a surety for the latter. He lends his name to enable the accommodated party to obtain credit or to raise money. He receives no part of the con-sideration for the instrument but assumes liability to the other parties thereto because he wants to accommodate another. In the instant case, the defendant signed as a drawee/acceptor. Under the Ne-gotiable Instrument Law, a drawee is primarily liable. Thus, if the defendant who is a lawyer, he should not have signed as an acceptor/drawee. In doing so, he became primarily and personally li-able for the drafts.

The defendant also contends that the drafts signed by him were not really bills of exchange but mere pieces of evidence of indebtedness because payments were made before acceptance. This is also without merit. Under the Negotiable Instruments Law, a bill of exchange is an unconditional order in writting addressed by one person to another, signed by the person giving it, requiring the person to whom it is addressed to pay on demand or at a fixed or determinable future time a sum certain in money to order or to bearer. 36 As long as a commercial paper conforms with the defini-tion of a bill of exchange, that paper is considered a bill of exchange. The nature of acceptance is important only in the determination of the kind of liabilities of the parties involved, but not in the determination of whether a commercial paper is a bill of exchange or not.

It is evident then that the defendant's appeal can not prosper. To grant the defendant's prayer will re -sult in a new trial which will serve no purpose and will just waste the time of the courts as well as of the parties because the defense is nil or ineffective. 37

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

SO ORDERED.

Teehankee (Chairman), Makasiar, Guerrero and Melencio-Herrera JJ., concur.

 

G.R. No. L-40796 July 31, 1975

REPUBLIC BANK, plaintiff-appellee, vs.MAURICIA T. EBRADA, defendant-appellant.

Sabino de Leon, Jr. for plaintiff-appellee.

Julio Baldonado for defendant-appellant.

 

MARTIN, J.:

Appeal on a question of law of the decision of the Court of First Instance of Manila, Branch XXIII in Civil Case No. 69288, entitled "Republic Bank vs. Mauricia T. Ebrada."

On or about February 27, 1963 defendant Mauricia T. Ebrada, encashed Back Pay Check No. 508060 dated January 15, 1963 for P1,246.08 at the main office of the plaintiff Republic Bank at Escolta, Manila. The check was issued by the Bureau of Treasury. 1 Plaintiff Bank was later ad-vised by the said bureau that the alleged indorsement on the reverse side of the aforesaid check by the payee, "Martin Lorenzo" was a forgery 2 since the latter had allegedly died as of July 14, 1952. 3 Plaintiff Bank was then requested by the Bureau of Treasury to refund the amount of P1,246.08. 4 To recover what it had refunded to the Bureau of Treasury, plaintiff Bank made verbal and formal demands upon defendant Ebrada to account for the sum of P1,246.08, but said defen-dant refused to do so. So plaintiff Bank sued defendant Ebrada before the City Court of Manila.

On July 11, 1966, defendant Ebrada filed her answer denying the material allegations of the com-plaint and as affirmative defenses alleged that she was a holder in due course of the check in ques-tion, or at the very least, has acquired her rights from a holder in due course and therefore entitled to the proceeds thereof. She also alleged that the plaintiff Bank has no cause of action against her; that it is in estoppel, or so negligent as not to be entitled to recover anything from her. 5

About the same day, July 11, 1966 defendant Ebrada filed a Third-Party complaint against Adelaida Dominguez who, in turn, filed on September 14, 1966 a Fourth-Party complaint against Justina Tinio.

On March 21, 1967, the City Court of Manila rendered judgment for the plaintiff Bank against de -fendant Ebrada; for Third-Party plaintiff against Third-Party defendant, Adelaida Dominguez, and for Fourth-Party plaintiff against Fourth-Party defendant, Justina Tinio.

From the judgment of the City Court, defendant Ebrada took an appeal to the Court of First In -stance of Manila where the parties submitted a partial stipulation of facts as follows:

COME NOW the undersigned counsel for the plaintiff, defendant, Third-Party defendant and Fourth-Party plaintiff and unto this Honorable Court most re-spectfully submit the following:

PARTIAL STIPULATION OF FACTS

1. That they admit their respective capacities to sue and be sued;

2. That on January 15, 1963 the Treasury of the Philippines issued its Check No. BP-508060, payable to the order of one MARTIN LORENZO, in the sum of P1,246.08, and drawn on the Republic Bank, plaintiff herein, which check will be marked as Exhibit "A" for the plaintiff;

3. That the back side of aforementioned check bears the following signatures, in this order:

1) MARTIN LORENZO;

2) RAMON R. LORENZO;

3) DELIA DOMINGUEZ; and

4) MAURICIA T. EBRADA;

4. That the aforementioned check was delivered to the defendant MAURICIA T. EBRADA by the Third-Party defendant and Fourth-Party plaintiff ADELAIDA DOMINGUEZ, for the purpose of encashment;

5. That the signature of defendant MAURICIA T. EBRADA was affixed on said check on February 27, 1963 when she encashed it with the plaintiff Bank;

6. That immediately after defendant MAURICIA T. EBRADA received the cash proceeds of said check in the sum of P1,246.08 from the plaintiff Bank, she im-mediately turned over the said amount to the third-party defendant and fourth-party plaintiff ADELAIDA DOMINGUEZ, who in turn handed the said amount to the fourth-party defendant JUSTINA TINIO on the same date, as evidenced by the receipt signed by her which will be marked as Exhibit "1-Dominguez"; and

7. That the parties hereto reserve the right to present evidence on any other fact not covered by the foregoing stipulations,

Manila, Philippines, June 6, 1969.

Based on the foregoing stipulation of facts and the documentary evidence presented, the trial court rendered a decision, the dispositive portion of which reads as follows:

WHEREFORE, the Court renders judgment ordering the defendant Mauricia T. Ebrada to pay the plaintiff the amount of ONE THOUSAND TWO FORTY-SIX 08/100 (P1,246.08), with interest at the legal rate from the filing of the com-plaint on June 16, 1966, until fully paid, plus the costs in both instances against Mauricia T. Ebrada.

The right of Mauricia T. Ebrada to file whatever claim she may have against Adelaida Dominguez in connection with this case is hereby reserved. The right of the estate of Dominguez to file the fourth-party complaint against Justina Tinio is also reserved.

SO ORDERED.

In her appeal, defendant-appellant presses that the lower court erred:

IN ORDERING THE APPELLANT TO PAY THE APPELLEE THE FACE VALUE OF THE SUBJECT CHECK AFTER FINDING THAT THE DRAWER ISSUED THE SUBJECT CHECK TO A PERSON ALREADY DE-CEASED FOR 11-½ YEARS AND THAT THE APPELLANT DID NOT BEN-EFIT FROM ENCASHING SAID CHECK.

From the stipulation of facts it is admitted that the check in question was delivered to defendant-ap-pellant by Adelaida Dominguez for the purpose of encashment and that her signature was affixed on said check when she cashed it with the plaintiff Bank. Likewise it is admitted that defendant-ap-pellant was the last indorser of the said check. As such indorser, she was supposed to have war-ranted that she has good title to said check; for under Section 65 of the Negotiable Instruments Law: 6

Every person negotiating an instrument by delivery or by qualified indorsement, warrants:

(a) That the instrument is genuine and in all respects what it purports to be.

(b) That she has good title to it.

xxx xxx xxx

and under Section 65 of the same Act:

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 sections;

(b) That the instrument is at the time of his indorsement valid and subsisting.

It turned out, however, that the signature of the original payee of the check, Martin Lorenzo was a forgery because he was already dead 7 almost 11 years before the check in question was issued by the Bureau of Treasury. Under action 23 of the Negotiable Instruments Law (Act 2031):

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 in -struments, or to give a discharge thereof against any party thereto, can be ac-quired 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.

It is clear from the provision that where the signature on a negotiable instrument if forged, the ne -gotiation of the check is without force or effect. But does this mean that the existence of one forged signature therein will render void all the other negotiations of the check with respect to the other parties whose signature are genuine?

In the case of Beam vs. Farrel, 135 Iowa 670, 113 N.W. 590, where a check has several indorse-ments on it, it was held that it is only the negotiation based on the forged or unauthorized signature which is inoperative. Applying this principle to the case before Us, it can be safely concluded that it is only the negotiation predicated on the forged indorsement that should be declared inoperative. This means that the negotiation of the check in question from Martin Lorenzo, the original payee, to Ramon R. Lorenzo, the second indorser, should be declared of no affect, but the negotiation of the aforesaid check from Ramon R. Lorenzo to Adelaida Dominguez, the third indorser, and from

Adelaida Dominguez to the defendant-appellant who did not know of the forgery, should be consid-ered valid and enforceable, barring any claim of forgery.

What happens then, if, after the drawee bank has paid the amount of the check to the holder thereof, it was discovered that the signature of the payee was forged? Can the drawee bank recover from the one who encashed the check?

In the case of State v. Broadway Mut. Bank, 282 S.W. 196, 197, it was held that the drawee of a check can recover from the holder the money paid to him on a forged instrument. It is not supposed to be its duty to ascertain whether the signatures of the payee or indorsers are genuine or not. This is because the indorser is supposed to warrant to the drawee that the signatures of the payee and previous indorsers are genuine, warranty not extending only to holders in due course. One who pur-chases a check or draft is bound to satisfy himself that the paper is genuine and that by indorsing it or presenting it for payment or putting it into circulation before presentation he impliedly asserts that he has performed his duty and the drawee who has paid the forged check, without actual negli-gence on his part, may recover the money paid from such negligent purchasers. In such cases the recovery is permitted because although the drawee was in a way negligent in failing to detect the forgery, yet if the encasher of the check had performed his duty, the forgery would in all probabil-ity, have been detected and the fraud defeated. The reason for allowing the drawee bank to recover from the encasher is:

Every one with even the least experience in business knows that no business man would accept a check in exchange for money or goods unless he is satis-fied that the check is genuine. He accepts it only because he has proof that it is genuine, or because he has sufficient confidence in the honesty and financial re-sponsibility of the person who vouches for it. If he is deceived he has suffered a loss of his cash or goods through his own mistake. His own credulity or reck-lessness, or misplaced confidence was the sole cause of the loss. Why should he be permitted to shift the loss due to his own fault in assuming the risk, upon the drawee, simply because of the accidental circumstance that the drawee after-wards failed to detect the forgery when the check was presented? 8

Similarly, in the case before Us, the defendant-appellant, upon receiving the check in question from Adelaida Dominguez, was duty-bound to ascertain whether the check in question was genuine be-fore presenting it to plaintiff Bank for payment. Her failure to do so makes her liable for the loss and the plaintiff Bank may recover from her the money she received for the check. As reasoned out above, had she performed the duty of ascertaining the genuineness of the check, in all probability the forgery would have been detected and the fraud defeated.

In our jurisdiction We have a case of similar import. 9 The Great Eastern Life Insurance Company drew its check for P2000.00 on the Hongkong and Shanghai Banking Corporation payable to the order of Lazaro Melicor. A certain E. M. Maasin fraudulently obtained the check and forged the sig-nature of Melicor, as an indorser, and then personally indorsed and presented the check to the Philippine National Bank where the amount of the check was placed to his (Maasin's) credit. On the next day, the Philippine National Bank indorsed the cheek to the Hongkong and Shanghai Banking Corporation which paid it and charged the amount of the check to the insurance company. The Court held that the Hongkong and Shanghai Banking Corporation was liable to the insurance com-pany for the amount of the check and that the Philippine National Bank was in turn liable to the Hongkong and Shanghai Banking Corporation. Said the Court:

Where a check is drawn payable to the order of one person and is presented to a bank by another and purports upon its face to have been duly indorsed by the payee of the check, it is the duty of the bank to know that the check was duly indorsed by the original payee, and where the bank pays the amount of the

check to a third person, who has forged the signature of the payee, the loss falls upon the bank who cashed the check, and its only remedy is against the person to whom it paid the money.

With the foregoing doctrine We are to concede that the plaintiff Bank should suffer the loss when it paid the amount of the check in question to defendant-appellant, but it has the remedy to recover from the latter the amount it paid to her. Although the defendant-appellant to whom the plaintiff Bank paid the check was not proven to be the author of the supposed forgery, yet as last indorser of the check, she has warranted that she has good title to it 10 even if in fact she did not have it be-cause the payee of the check was already dead 11 years before the check was issued. The fact that immediately after receiving title cash proceeds of the check in question in the amount of P1,246.08 from the plaintiff Bank, defendant-appellant immediately turned over said amount to Adelaida Dominguez (Third-Party defendant and the Fourth-Party plaintiff) who in turn handed the amount to Justina Tinio on the same date would not exempt her from liability because by doing so, she acted as an accommodation party in the check for which she is also liable under Section 29 of the Negotiable Instruments Law (Act 2031), thus: .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.

IN VIEW OF THE FOREGOING, the judgment appealed from is hereby affirmed in toto with costs against defendant-appellant.

SO ORDERED.

Makalintal, C.J, Castro, Makasiar and Esguerra, JJ., concur.

G.R. No. 121413        January 29, 2001

PHILIPPINE COMMERCIAL INTERNATIONAL BANK (formerly INSULAR BANK OF ASIA AND AMERICA),petitioner, vs.COURT OF APPEALS and FORD PHILIPPINES, INC. and CITIBANK, N.A., respondents.

G.R. No. 121479        January 29, 2001

FORD PHILIPPINES, INC., petitioner-plaintiff, vs.COURT OF APPEALS and CITIBANK, N.A. and PHILIPPINE COMMERCIAL INTER-NATIONAL BANK,respondents.

G.R. No. 128604        January 29, 2001

FORD PHILIPPINES, INC., petitioner, vs.CITIBANK, N.A., PHILIPPINE COMMERCIAL INTERNATIONAL BANK and COURT OF APPEALS, respondents.

QUISUMBING, J.:

These consolidated petitions involve several fraudulently negotiated checks.

The original actions a quo were instituted by Ford Philippines to recover from the drawee bank, CITIBANK, N.A. (Citibank) and collecting bank, Philippine Commercial International Bank (PCIBank) [formerly Insular Bank of Asia and America], the value of several checks payable to the Commissioner of Internal Revenue, which were embezzled allegedly by an organized syndi-cate.1âwphi1.nêt

G.R. Nos. 121413 and 121479 are twin petitions for review of the March 27, 1995 Decision1 of the Court of Appeals in CA-G.R. CV No. 25017, entitled "Ford Philippines, Inc. vs. Citibank, N.A. and Insular Bank of Asia and America (now Philipppine Commercial International Bank), and the Au-gust 8, 1995 Resolution,2 ordering the collecting bank, Philippine Commercial International Bank, to pay the amount of Citibank Check No. SN-04867.

In G.R. No. 128604, petitioner Ford Philippines assails the October 15, 1996 Decision3 of the Court of Appeals and its March 5, 1997 Resolution4 in CA-G.R. No. 28430 entitled "Ford Philip-pines, Inc. vs. Citibank, N.A. and Philippine Commercial International Bank," affirming in toto the judgment of the trial court holding the defendant drawee bank, Citibank, N.A., solely liable to pay the amount of P12,163,298.10 as damages for the misapplied proceeds of the plaintiff's Citibanl Check Numbers SN-10597 and 16508.

I. G.R. Nos. 121413 and 121479

The stipulated facts submitted by the parties as accepted by the Court of Appeals are as follows:

"On October 19, 1977, the plaintiff Ford drew and issued its Citibank Check No. SN-04867 in the amount of P4,746,114.41, in favor of the Commissioner of Internal Revenue as payment of plaintiff;s percentage or manufacturer's sales taxes for the third quarter of 1977.

The aforesaid check was deposited with the degendant IBAA (now PCIBank) and was subsequently cleared at the Central Bank. Upon presentment with the defendant Citibank, the proceeds of the check was paid to IBAA as collecting or depository bank.

The proceeds of the same Citibank check of the plaintiff was never paid to or received by the payee thereof, the Commissioner of Internal Revenue.

As a consequence, upon demand of the Bureau and/or Commissioner of Internal Rev-enue, the plaintiff was compelled to make a second payment to the Bureau of Internal Revenue of its percentage/manufacturers' sales taxes for the third quarter of 1977 and that said second payment of plaintiff in the amount of P4,746,114.41 was duly received by the Bureau of Internal Revenue.

It is further admitted by defendant Citibank that during the time of the transactions in question, plaintiff had been maintaining a checking account with defendant Citibank; that Citibank Check No. SN-04867 which was drawn and issued by the plaintiff in favor of the Commissioner of Internal Revenue was a crossed check in that, on its face were two parallel lines and written in between said lines was the phrase "Payee's Account Only"; and that defendant Citibank paid the full face value of the check in the amount of P4,746,114.41 to the defendant IBAA.

It has been duly established that for the payment of plaintiff's percentage tax for the last quarter of 1977, the Bureau of Internal Revenue issued Revenue Tax Receipt No. 18747002, dated October 20, 1977, designating therein in Muntinlupa, Metro Manila, as the authorized agent bank of Metrobanl, Alabang branch to receive the tax payment of the plaintiff.

On December 19, 1977, plaintiff's Citibank Check No. SN-04867, together with the Rev-enue Tax Receipt No. 18747002, was deposited with defendant IBAA, through its Ermita Branch. The latter accepted the check and sent it to the Central Clearing House for clear -ing on the samd day, with the indorsement at the back "all prior indorsements and/or lack of indorsements guaranteed." Thereafter, defendant IBAA presented the check for pay-ment to defendant Citibank on same date, December 19, 1977, and the latter paid the face value of the check in the amount of P4,746,114.41. Consequently, the amount of P4,746,114.41 was debited in plaintiff's account with the defendant Citibank and the check was returned to the plaintiff.

Upon verification, plaintiff discovered that its Citibank Check No. SN-04867 in the amount of P4,746,114.41 was not paid to the Commissioner of Internal Revenue. Hence, in separate letters dated October 26, 1979, addressed to the defendants, the plaintiff noti-fied the latter that in case it will be re-assessed by the BIR for the payment of the taxes covered by the said checks, then plaintiff shall hold the defendants liable for reimburse-ment of the face value of the same. Both defendants denied liability and refused to pay.

In a letter dated February 28, 1980 by the Acting Commissioner of Internal Revenue ad-dressed to the plaintiff - supposed to be Exhibit "D", the latter was officially informed, among others, that its check in the amount of P4, 746,114.41 was not paid to the govern-ment or its authorized agent and instead encashed by unauthorized persons, hence, plain-tiff has to pay the said amount within fifteen days from receipt of the letter. Upon advice of the plaintiff's lawyers, plaintiff on March 11, 1982, paid to the Bureau of Internal Rev-enue, the amount of P4,746,114.41, representing payment of plaintiff's percentage tax for the third quarter of 1977.

As a consequence of defendant's refusal to reimburse plaintiff of the payment it had made for the second time to the BIR of its percentage taxes, plaintiff filed on January 20, 1983 its original complaint before this Court.

On December 24, 1985, defendant IBAA was merged with the Philippine Commercial In-ternational Bank (PCI Bank) with the latter as the surviving entity.

Defendant Citibank maintains that; the payment it made of plaintiff's Citibank Check No. SN-04867 in the amount of P4,746,114.41 "was in due course"; it merely relied on the clearing stamp of the depository/collecting bank, the defendant IBAA that "all prior in-dorsements and/or lack of indorsements guaranteed"; and the proximate cause of plain-tiff's injury is the gross negligence of defendant IBAA in indorsing the plaintiff's Citibank check in question.

It is admitted that on December 19, 1977 when the proceeds of plaintiff's Citibank Check No. SN-048867 was paid to defendant IBAA as collecting bank, plaintiff was maintaining a checking account with defendant Citibank."5

Although it was not among the stipulated facts, an investigation by the National Bureau of Investi -gation (NBI) revealed that Citibank Check No. SN-04867 was recalled by Godofredo Rivera, the General Ledger Accountant of Ford. He purportedly needed to hold back the check because there was an error in the computation of the tax due to the Bureau of Internal Revenue (BIR). With Rivera's instruction, PCIBank replaced the check with two of its own Manager's Checks (MCs). Al-leged members of a syndicate later deposited the two MCs with the Pacific Banking Corporation.

Ford, with leave of court, filed a third-party complaint before the trial court impleading Pacific Banking Corporation (PBC) and Godofredo Rivera, as third party defendants. But the court dis-missed the complaint against PBC for lack of cause of action. The course likewise dismissed the

third-party complaint against Godofredo Rivera because he could not be served with summons as the NBI declared him as a "fugitive from justice".

On June 15, 1989, the trial court rendered its decision, as follows:

"Premises considered, judgment is hereby rendered as follows:

"1. Ordering the defendants Citibank and IBAA (now PCI Bank), jointly and severally, to pay the plaintiff the amount of P4,746,114.41 representing the face value of plaintiff's Citibank Check No. SN-04867, with interest thereon at the legal rate starting January 20, 1983, the date when the original complaint was filed until the amount is fully paid, plus costs;

"2. On defendant Citibank's cross-claim: ordering the cross-defendant IBAA (now PCI Bank) to reimburse defendant Citibank for whatever amount the latter has paid or may pay to the plaintiff in accordance with next preceding para-graph;

"3. The counterclaims asserted by the defendants against the plaintiff, as well as that asserted by the cross-defendant against the cross-claimant are dismissed, for lack of merits; and

"4. With costs against the defendants.

SO ORDERED."6

Not satisfied with the said decision, both defendants, Citibank and PCIBank, elevated their respec-tive petitions for review on certiorari to the Courts of Appeals. On March 27, 1995, the appellate court issued its judgment as follows:

"WHEREFORE, in view of the foregoing, the court AFFIRMS the appealed decision with modifications.

The court hereby renderes judgment:

1. Dismissing the complaint in Civil Case No. 49287 insofar as defendant Citibank N.A. is concerned;

2. Ordering the defendant IBAA now PCI Bank to pay the plaintiff the amount of P4,746,114.41 representing the face value of plaintiff's Citibank Check No. SN-04867, with interest thereon at the legal rate starting January 20, 1983, the date when the original complaint was filed until the amount is fully paid;

3. Dismissing the counterclaims asserted by the defendants against the plaintiff as well as that asserted by the cross-defendant against the cross-claimant, for lack of merits.

Costs against the defendant IBAA (now PCI Bank).

IT IS SO ORDERED."7

PCI Bank moved to reconsider the above-quoted decision of the Court of Appeals, while Ford filed a "Motion for Partial Reconsideration." Both motions were denied for lack of merit.

Separately, PCIBank and Ford filed before this Court, petitions for review by certiorari under Rule 45.

In G.R. No. 121413, PCIBank seeks the reversal of the decision and resolution of the Twelfth Divi-sion of the Court of Appeals contending that it merely acted on the instruction of Ford and such ca-sue of action had already prescribed.

PCIBank sets forth the following issues for consideration:

I. Did the respondent court err when, after finding that the petitioner acted on the check drawn by respondent Ford on the said respondent's instructions, it nevertheless found the petitioner liable to the said respondent for the full amount of the said check.

II. Did the respondent court err when it did not find prescription in favor of the peti-tioner.8

In a counter move, Ford filed its petition docketed as G.R. No. 121479, questioning the same deci-sion and resolution of the Court of Appeals, and praying for the reinstatement in toto of the decision of the trial court which found both PCIBank and Citibank jointly and severally liable for the loss.

In G.R. No. 121479, appellant Ford presents the following propositions for consideration:

I. Respondent Citibank is liable to petitioner Ford considering that:

1. As drawee bank, respondent Citibank owes to petitioner Ford, as the drawer of the subject check and a depositor of respondent Citibank, an absolute and contractual duty to pay the proceeds of the subject check only to the payee thereof, the Commissioner of Internal Revenue.

2. Respondent Citibank failed to observe its duty as banker with respect to the subject check, which was crossed and payable to "Payee's Account Only."

3. Respondent Citibank raises an issue for the first time on appeal; thus the same should not be considered by the Honorable Court.

4. As correctly held by the trial court, there is no evidence of gross negligence on the part of petitioner Ford.9

II. PCI Bank is liable to petitioner Ford considering that:

1. There were no instructions from petitioner Ford to deliver the proceeds of the subject check to a person other than the payee named therein, the Commissioner of the Bureau of Internal Revenue; thus, PCIBank's only obligation is to deliver the proceeds to the Commissioner of the Bureau of Internal Revenue.10

2. PCIBank which affixed its indorsement on the subject check ("All prior in-dorsement and/or lack of indorsement guaranteed"), is liable as collecting bank.11

3. PCIBank is barred from raising issues of fact in the instant proceedings.12

4. Petitioner Ford's cause of action had not prescribed.13

II. G.R. No. 128604

The same sysndicate apparently embezzled the proceeds of checks intended, this time, to settle Ford's percentage taxes appertaining to the second quarter of 1978 and the first quarter of 1979.

The facts as narrated by the Court of Appeals are as follows:

Ford drew Citibank Check No. SN-10597 on July 19, 1978 in the amount of P5,851,706.37 repre-senting the percentage tax due for the second quarter of 1978 payable to the Commissioner of Inter-nal Revenue. A BIR Revenue Tax Receipt No. 28645385 was issued for the said purpose.

On April 20, 1979, Ford drew another Citibank Check No. SN-16508 in the amount of P6,311,591.73, representing the payment of percentage tax for the first quarter of 1979 and payable to the Commissioner of Internal Revenue. Again a BIR Revenue Tax Receipt No. A-1697160 was issued for the said purpose.

Both checks were "crossed checks" and contain two diagonal lines on its upper corner between, which were written the words "payable to the payee's account only."

The checks never reached the payee, CIR. Thus, in a letter dated February 28, 1980, the BIR, Re-gion 4-B, demanded for the said tax payments the corresponding periods above-mentioned.

As far as the BIR is concernced, the said two BIR Revenue Tax Receipts were considered "fake and spurious". This anomaly was confirmed by the NBI upon the initiative of the BIR. The findings forced Ford to pay the BIR a new, while an action was filed against Citibank and PCIBank for the recovery of the amount of Citibank Check Numbers SN-10597 and 16508.

The Regional Trial Court of Makati, Branch 57, which tried the case, made its findings on the modus operandi of the syndicate, as follows:

"A certain Mr. Godofredo Rivera was employed by the plaintiff FORD as its General Ledger Accountant. As such, he prepared the plaintiff's check marked Ex. 'A' [Citibank Check No. Sn-10597] for payment to the BIR. Instead, however, fo delivering the same of the payee, he passed on the check to a co-conspirator named Remberto Castro who was a pro-manager of the San Andres Branch of PCIB.* In connivance with one Winston Dulay, Castro himself subsequently opened a Checking Account in the name of a fictitious per-son denominated as 'Reynaldo reyes' in the Meralco Branch of PCIBank where Dulay works as Assistant Manager.

After an initial deposit of P100.00 to validate the account, Castro deposited a worthless Bank of America Check in exactly the same amount as the first FORD check (Exh. "A", P5,851,706.37) while this worthless check was coursed through PCIB's main office en-route to the Central Bank for clearing, replaced this worthless check with FORD's Exhibit 'A' and accordingly tampered the accompanying documents to cover the replacement. As a result, Exhibit 'A' was cleared by defendant CITIBANK, and the fictitious deposit ac -count of 'Reynaldo Reyes' was credited at the PCIB Meralco Branch with the total amount of the FORD check Exhibit 'A'. The same method was again utilized by the syn-dicate in profiting from Exh. 'B' [Citibank Check No. SN-16508] which was subsequently pilfered by Alexis Marindo, Rivera's Assistant at FORD.

From this 'Reynaldo Reyes' account, Castro drew various checks distributing the sahres of the other participating conspirators namely (1) CRISANTO BERNABE, the mastermind who formulated the method for the embezzlement; (2) RODOLFO R. DE LEON a cus-toms broker who negotiated the initial contact between Bernabe, FORD's Godofredo Rivera and PCIB's Remberto Castro; (3) JUAN VASTILLO who assisted de Leon in the initial arrangements; (4) GODOFREDO RIVERA, FORD's accountant who passed on the first check (Exhibit "A") to Castro; (5) REMERTO CASTRO, PCIB's pro-manager at San Andres who performed the switching of checks in the clearing process and opened the fictitious Reynaldo Reyes account at the PCIB Meralco Branch; (6) WINSTON DULAY, PCIB's Assistant Manager at its Meralco Branch, who assisted Castro in switching the checks in the clearing process and facilitated the opening of the fictitious Reynaldo Reyes' bank account; (7) ALEXIS MARINDO, Rivera's Assistant at FORD, who gave the second check (Exh. "B") to Castro; (8) ELEUTERIO JIMENEZ, BIR Collection Agent who provided the fake and spurious revenue tax receipts to make it appear that the BIR had received FORD's tax payments.

Several other persons and entities were utilized by the syndicate as conduits in the dis-bursements of the proceeds of the two checks, but like the aforementioned participants in the conspiracy, have not been impleaded in the present case. The manner by which the said funds were distributed among them are traceable from the record of checks drawn against the original "Reynaldo Reyes" account and indubitably identify the parties who il-legally benefited therefrom and readily indicate in what amounts they did so."14

On December 9, 1988, Regional Trial Court of Makati, Branch 57, held drawee-bank, Citibank, li-able for the value of the two checks while adsolving PCIBank from any liability, disposing as fol-lows:

"WHEREFORE, judgment is hereby rendered sentencing defendant CITIBANK to reim-burse plaintiff FORD the total amount of P12,163,298.10 prayed for in its complaint, with 6% interest thereon from date of first written demand until full payment, plus P300,000.00 attorney's fees and expenses litigation, and to pay the defendant, PCIB (on its counterclaim to crossclaim) the sum of P300,000.00 as attorney's fees and costs of liti-gation, and pay the costs.

SO ORDERED."15

Both Ford and Citibank appealed to the Court of Appeals which affirmed, in toto, the decision of the trial court. Hence, this petition.

Petitioner Ford prays that judgment be rendered setting aside the portion of the Court of Appeals decision and its resolution dated March 5, 1997, with respect to the dismissal of the complaint against PCIBank and holding Citibank solely responsible for the proceeds of Citibank Check Num-bers SN-10597 and 16508 for P5,851,706.73 and P6,311,591.73 respectively.

Ford avers that the Court of Appeals erred in dismissing the complaint against defendant PCIBank considering that:

I. Defendant PCIBank was clearly negligent when it failed to exercise the diligence re-quired to be exercised by it as a banking insitution.

II. Defendant PCIBank clearly failed to observe the diligence required in the selection and supervision of its officers and employees.

III. Defendant PCIBank was, due to its negligence, clearly liable for the loss or damage resulting to the plaintiff Ford as a consequence of the substitution of the check consistent with Section 5 of Central Bank Circular No. 580 series of 1977.

IV. Assuming arguedo that defedant PCIBank did not accept, endorse or negotiate in due course the subject checks, it is liable, under Article 2154 of the Civil Code, to return the money which it admits having received, and which was credited to it its Central bank ac-count.16

The main issue presented for our consideration by these petitions could be simplified as follows: Has petitioner Ford the right to recover from the collecting bank (PCIBank) and the drawee bank (Citibank) the value of the checks intended as payment to the Commissioner of Internal Revenue? Or has Ford's cause of action already prescribed?

Note that in these cases, the checks were drawn against the drawee bank, but the title of the person negotiating the same was allegedly defective because the instrument was obtained by fraud and un-lawful means, and the proceeds of the checks were not remitted to the payee. It was established that instead of paying the checks to the CIR, for the settlement of the approprite quarterly percentage taxes of Ford, the checks were diverted and encashed for the eventual distribution among the mm -

bers of the syndicate. As to the unlawful negotiation of the check the applicable law is Section 55 of the Negotiable Instruments Law (NIL), which provides:

"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 fore 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."

Pursuant to this provision, it is vital to show that the negotiation is made by the perpetator in breach of faith amounting to fraud. The person negotiating the checks must have gone beyond the author-ity given by his principal. If the principal could prove that there was no negligence in the perfor -mance of his duties, he may set up the personal defense to escape liability and recover from other parties who. Though their own negligence, alowed the commission of the crime.

In this case, we note that the direct perpetrators of the offense, namely the embezzlers belonging to a syndicate, are now fugitives from justice. They have, even if temporarily, escaped liability for the embezzlement of millions of pesos. We are thus left only with the task of determining who of the present parties before us must bear the burden of loss of these millions. It all boils down to theques-tion of liability based on the degree of negligence among the parties concerned.

Foremost, we must resolve whether the injured party, Ford, is guilty of the "imputed contributory negligence" that would defeat its claim for reimbursement, bearing ing mind that its employees, Godofredo Rivera and Alexis Marindo, were among the members of the syndicate.

Citibank points out that Ford allowed its very own employee, Godofredo Rivera, to negotiate the checks to his co-conspirators, instead of delivering them to the designated authorized collecting bank (Metrobank-Alabang) of the payee, CIR. Citibank bewails the fact that Ford was remiss in the supervision and control of its own employees, inasmuch as it only discovered the syndicate's activi-ties through the information given by the payee of the checks after an unreasonable period of time.

PCIBank also blames Ford of negligence when it allegedly authorized Godofredo Rivera to divert the proceeds of Citibank Check No. SN-04867, instead of using it to pay the BIR. As to the subse-quent run-around of unds of Citibank Check Nos. SN-10597 and 16508, PCIBank claims that the proximate cause of the damge to Ford lies in its own officers and employees who carried out the fradulent schemes and the transactions. These circumstances were not checked by other officers of the company including its comptroller or internal auditor. PCIBank contends that the inaction of Ford despite the enormity of the amount involved was a sheer negligence and stated that, as be-tween two innocent persons, one of whom must suffer the consequences of a breach of trust, the one who made it possible, by his act of negligence, must bear the loss.

For its part, Ford denies any negligence in the performance of its duties. It avers that there was no evidence presented before the trial court showing lack of diligence on the part of Ford. And, citing the case of Gempesaw vs. Court of Appeals,17 Ford argues that even if there was a finding therein that the drawer was negligent, the drawee bank was still ordered to pay damages.

Furthermore, Ford contends the Godofredo rivera was not authorized to make any representation in its behalf, specifically, to divert the proceeds of the checks. It adds that Citibank raised the issue of imputed negligence against Ford for the first time on appeal. Thus, it should not be considered by this Court.

On this point, jurisprudence regarding the imputed negligence of employer in a master-servant rela-tionship is instructive. Since a master may be held for his servant's wrongful act, the law imputes to the master the act of the servant, and if that act is negligent or wrongful and proximately results in injury to a third person, the negligence or wrongful conduct is the negligence or wrongful conduct

of the master, for which he is liable.18 The general rule is that if the master is injured by the negli-gence of a third person and by the concuring contributory negligence of his own servant or agent, the latter's negligence is imputed to his superior and will defeat the superior's action against the third person, asuming, of course that the contributory negligence was the proximate cause of the injury of which complaint is made.19

Accordingly, we need to determine whether or not the action of Godofredo Rivera, Ford's General Ledger Accountant, and/or Alexis Marindo, his assistant, was the proximate cause of the loss or damage. AS defined, proximate cause is that which, in the natural and continuous sequence, unbro-ken by any efficient, intervening cause produces the injury and without the result would not have occurred.20

It appears that although the employees of Ford initiated the transactions attributable to an organized syndicate, in our view, their actions were not the proximate cause of encashing the checks payable to the CIR. The degree of Ford's negligence, if any, could not be characterized as the proximate cause of the injury to the parties.

The Board of Directors of Ford, we note, did not confirm the request of Godofredo Rivera to recall Citibank Check No. SN-04867. Rivera's instruction to replace the said check with PCIBank's Man-ager's Check was not in theordinary course of business which could have prompted PCIBank to validate the same.

As to the preparation of Citibank Checks Nos. SN-10597 and 16508, it was established that these checks were made payable to the CIR. Both were crossed checks. These checks were apparently turned around by Ford's emploees, who were acting on their own personal capacity.

Given these circumstances, the mere fact that the forgery was committed by a drawer-payor's confi-dential employee or agent, who by virtue of his position had unusual facilities for perpertrating the fraud and imposing the forged paper upon the bank, does notentitle the bank toshift the loss to the drawer-payor, in the absence of some circumstance raising estoppel against the drawer.21 This rule likewise applies to the checks fraudulently negotiated or diverted by the confidential employees who hold them in their possession.

With respect to the negligence of PCIBank in the payment of the three checks involved, separately, the trial courts found variations between the negotiation of Citibank Check No. SN-04867 and the misapplication of total proceeds of Checks SN-10597 and 16508. Therefore, we have to scrutinize, separately, PCIBank's share of negligence when the syndicate achieved its ultimate agenda of steal-ing the proceeds of these checks.

G.R. Nos. 121413 and 121479

Citibank Check No. SN-04867 was deposited at PCIBank through its Ermita Branch. It was coursed through the ordinary banking transaction, sent to Central Clearing with the indorsement at the back "all prior indorsements and/or lack of indorsements guaranteed," and was presented to Citibank for payment. Thereafter PCIBank, instead of remitting the proceeds to the CIR, prepared two of its Manager's checks and enabled the syndicate to encash the same.

On record, PCIBank failed to verify the authority of Mr. Rivera to negotiate the checks. The neglect of PCIBank employees to verify whether his letter requesting for the replacement of the Citibank Check No. SN-04867 was duly authorized, showed lack of care and prudence required in the cir-cumstances.

Furthermore, it was admitted that PCIBank is authorized to collect the payment of taxpayers in be-half of the BIR. As an agent of BIR, PCIBank is duty bound to consult its principal regarding the unwarranted instructions given by the payor or its agent. As aptly stated by the trial court, to wit:

"xxx. Since the questioned crossed check was deposited with IBAA [now PCIBank], which claimed to be a depository/collecting bank of BIR, it has the responsibility to make sure that the check in question is deposited in Payee's account only.

xxx      xxx      xxx

As agent of the BIR (the payee of the check), defendant IBAA should receive instructions only from its principal BIR and not from any other person especially so when that person is not known to the defendant. It is very imprudent on the part of the defendant IBAA to just rely on the alleged telephone call of the one Godofredo Rivera and in his signature considering that the plaintiff is not a client of the defendant IBAA."

It is a well-settled rule that the relationship between the payee or holder of commercial paper and the bank to which it is sent for collection is, in the absence of an argreement to the contrary, that of principal and agent.22 A bank which receives such paper for collection is the agent of the payee or holder.23

Even considering arguendo, that the diversion of the amount of a check payable to the collecting bank in behalf of the designated payee may be allowed, still such diversion must be properly autho-rized by the payor. Otherwise stated, the diversion can be justified only by proof of authority from the drawer, or that the drawer has clothed his agent with apparent authority to receive the proceeds of such check.

Citibank further argues that PCI Bank's clearing stamp appearing at the back of the questioned checks stating that ALL PRIOR INDORSEMENTS AND/OR LACK OF INDORSEMENTS GU-RANTEED should render PCIBank liable because it made it pass through the clearing house and therefore Citibank had no other option but to pay it. Thus, Citibank had no other option but to pay it. Thus, Citibank assets that the proximate cause of Ford's injury is the gross negligence of PCIBank. Since the questione dcrossed check was deposited with PCIBank, which claimed to be a depository/collecting bank of the BIR, it had the responsibility to make sure that the check in ques-tions is deposited in Payee's account only.

Indeed, the crossing of the check with the phrase "Payee's Account Only," is a warning that the check should be deposited only in the account of the CIR. Thus, it is the duty of the collecting bank PCIBank to ascertain that the check be deposited in payee's account only. Therefore, it is the col-lecting bank (PCIBank) which is bound to scruninize the check and to know its depositors before it could make the clearing indorsement "all prior indorsements and/or lack of indorsement guaran-teed".

In Banco de Oro Savings and Mortgage Bank vs. Equitable Banking Corporation,24 we ruled:

"Anent petitioner's liability on said instruments, this court is in full accord with the ruling of the PCHC's Board of Directors that:

'In presenting the checks for clearing and for payment, the defendant made an express guarantee on the validity of "all prior endorsements." Thus, stamped at the back of the checks are the defedant's clear warranty: ALL PRIOR ENDORSEMENTS AND/OR LACK OF ENDORSEMENTS GUARANTEED. Without such warranty, plaintiff would not have paid on the checks.'

No amount of legal jargon can reverse the clear meaning of defendant's warranty. As the warranty has proven to be false and inaccurate, the defendant is liable for any damage arising out of the falsity of its representation."25

Lastly, banking business requires that the one who first cashes and negotiates the check must take some percautions to learn whether or not it is genuine. And if the one cashing the check through in -

difference or othe circumstance assists the forger in committing the fraud, he should not be permit-ted to retain the proceeds of the check from the drawee whose sole fault was that it did not discover the forgery or the defect in the title of the person negotiating the instrument before paying the check. For this reason, a bank which cashes a check drawn upon another bank, without requiring proof as to the identity of persons presenting it, or making inquiries with regard to them, cannot hold the proceeds against the drawee when the proceeds of the checks were afterwards diverted to the hands of a third party. In such cases the drawee bank has a right to believe that the cashing bank (or the collecting bank) had, by the usual proper investigation, satisfied itself of the authenticity of the negotiation of the checks. Thus, one who encashed a check which had been forged or diverted and in turn received payment thereon from the drawee, is guilty of negligence which proximately contributed to the success of the fraud practiced on the drawee bank. The latter may recover from the holder the money paid on the check.26

Having established that the collecting bank's negligence is the proximate cause of the loss, we con -clude that PCIBank is liable in the amount corresponding to the proceeds of Citibank Check No. SN-04867.

G.R. No. 128604

The trial court and the Court of Appeals found that PCIBank had no official act in the ordinary course of business that would attribute to it the case of the embezzlement of Citibank Check Num-bers SN-10597 and 16508, because PCIBank did not actually receive nor hold the two Ford checks at all. The trial court held, thus:

"Neither is there any proof that defendant PCIBank contributed any official or conscious participation in the process of the embezzlement. This Court is convinced that the switch-ing operation (involving the checks while in transit for "clearing") were the clandestine or hidden actuations performed by the members of the syndicate in their own personl, covert and private capacity and done without the knowledge of the defendant PCIBank…"27

In this case, there was no evidence presented confirming the conscious particiapation of PCIBank in the embezzlement. As a general rule, however, a banking corporation is liable for the wrongful or tortuous acts and declarations of its officers or agents within the course and scope of their employ-ment.28 A bank will be held liable for the negligence of its officers or agents when acting within the course and scope of their employment. It may be liable for the tortuous acts of its officers even as regards that species of tort of which malice is an essential element. In this case, we find a situa-tion where the PCIBank appears also to be the victim of the scheme hatched by a syndicate in which its own management employees had particiapted.

The pro-manager of San Andres Branch of PCIBank, Remberto Castro, received Citibank Check Numbers SN-10597 and 16508. He passed the checks to a co-conspirator, an Assistant Manager of PCIBank's Meralco Branch, who helped Castro open a Checking account of a fictitious person named "Reynaldo Reyes." Castro deposited a worthless Bank of America Check in exactly the same amount of Ford checks. The syndicate tampered with the checks and succeeded in replacing the worthless checks and the eventual encashment of Citibank Check Nos. SN 10597 and 16508. The PCIBank Ptro-manager, Castro, and his co-conspirator Assistant Manager apparently per-formed their activities using facilities in their official capacity or authority but for their personal and private gain or benefit.

A bank holding out its officers and agents as worthy of confidence will not be permitted to profit by the frauds these officers or agents were enabled to perpetrate in the apparent course of their em-ployment; nor will t be permitted to shirk its responsibility for such frauds, even though no benefit may accrue to the bank therefrom. For the general rule is that a bank is liable for the fraudulent acts or representations of an officer or agent acting within the course and apparent scope of his employ-ment or authority.29 And if an officer or employee of a bank, in his official capacity, receives

money to satisfy an evidence of indebetedness lodged with his bank for collection, the bank is li-able for his misappropriation of such sum.30

Moreover, as correctly pointed out by Ford, Section 531 of Central Bank Circular No. 580, Series of 1977 provides that any theft affecting items in transit for clearing, shall be for the account of sending bank, which in this case is PCIBank.

But in this case, responsibility for negligence does not lie on PCIBank's shoulders alone.

The evidence on record shows that Citibank as drawee bank was likewise negligent in the perfor-mance of its duties. Citibank failed to establish that its payment of Ford's checjs were made in due course and legally in order. In its defense, Citibank claims the genuineness and due execution of said checks, considering that Citibank (1) has no knowledge of any informity in the issuance of the checks in question (2) coupled by the fact that said checks were sufficiently funded and (3) the en-dorsement of the Payee or lack thereof was guaranteed by PCI Bank (formerly IBAA), thus, it has the obligation to honor and pay the same.

For its part, Ford contends that Citibank as the drawee bank owes to Ford an absolute and contrac-tual duty to pay the proceeds of the subject check only to the payee thereof, the CIR. Citing Section 6232 of the Negotiable Instruments Law, Ford argues that by accepting the instrument, the acceptro which is Citibank engages that it will pay according to the tenor of its acceptance, and that it will pay only to the payee, (the CIR), considering the fact that here the check was crossed with annota-tion "Payees Account Only."

As ruled by the Court of Appeals, Citibank must likewise answer for the damages incurred by Ford on Citibank Checks Numbers SN 10597 and 16508, because of the contractual relationship existing between the two. Citibank, as the drawee bank breached its contractual obligation with Ford and such degree of culpability contributed to the damage caused to the latter. On this score, we agree with the respondent court's ruling.

Citibank should have scrutinized Citibank Check Numbers SN 10597 and 16508 before paying the amount of the proceeds thereof to the collecting bank of the BIR. One thing is clear from the record: the clearing stamps at the back of Citibank Check Nos. SN 10597 and 16508 do not bear any initials. Citibank failed to notice and verify the absence of the clearing stamps. Had this been duly examined, the switching of the worthless checks to Citibank Check Nos. 10597 and 16508 would have been discovered in time. For this reason, Citibank had indeed failed to perform what was incumbent upon it, which is to ensure that the amount of the checks should be paid only to its designated payee. The fact that the drawee bank did not discover the irregularity seasonably, in our view, consitutes negligence in carrying out the bank's duty to its depositors. The point is that as a business affected with public interest and because of the nature of its functions, the bank is under obligation to treat the accounts of its depositors with meticulous care, always having in mind the fiduciary nature of their relationship.33

Thus, invoking the doctrine of comparative negligence, we are of the view that both PCIBank and Citibank failed in their respective obligations and both were negligent in the selection and supervi-sion of their employees resulting in the encashment of Citibank Check Nos. SN 10597 AND 16508. Thus, we are constrained to hold them equally liable for the loss of the proceeds of said checks is-sued by Ford in favor of the CIR.

Time and again, we have stressed that banking business is so impressed with public interest where the trust and confidence of the public in general is of paramount umportance such that the appropri-ate standard of diligence must be very high, if not the highest, degree of diligence.34 A bank's lia-bility as obligor is not merely vicarious but primary, wherein the defense of exercise of due dili-gence in the selection and supervision of its employees is of no moment.35

Banks handle daily transactions involving millions of pesos.36 By the very nature of their work the degree of responsibility, care and trustworthiness expected of their employees and officials is far greater than those of ordinary clerks and employees.37 Banks are expected to exercise the highest degree of diligence in the selection and supervision of their employees.38

On the issue of prescription, PCIBank claims that the action of Ford had prescribed because of its inability to seek judicial relief seasonably, considering that the alleged negligent act took place prior to December 19, 1977 but the relief was sought only in 1983, or seven years thereafter.

The statute of limitations begins to run when the bank gives the depositor notice of the payment, which is ordinarily when the check is returned to the alleged drawer as a voucher with a statement of his account,39 and an action upon a check is ordinarily governed by the statutory period applica-ble to instruments in writing.40

Our laws on the matter provide that the action upon a written contract must be brought within ten year from the time the right of action accrues.41 hence, the reckoning time for the prescriptive pe-riod begins when the instrument was issued and the corresponding check was returned by the bank to its depositor (normally a month thereafter). Applying the same rule, the cause of action for the recovery of the proceeds of Citibank Check No. SN 04867 would normally be a month after De-cember 19, 1977, when Citibank paid the face value of the check in the amount of P4,746,114.41. Since the original complaint for the cause of action was filed on January 20, 1984, barely six years had lapsed. Thus, we conclude that Ford's cause of action to recover the amount of Citibank Check No. SN 04867 was seasonably filed within the period provided by law.

Finally, we also find thet Ford is not completely blameless in its failure to detect the fraud. Failure on the part of the depositor to examine its passbook, statements of account, and cancelled checks and to give notice within a reasonable time (or as required by statute) of any discrepancy which it may in the exercise of due care and diligence find therein, serves to mitigate the banks' liability by reducing the award of interest from twelve percent (12%) to six percent (6%) per annum. As pro-vided in Article 1172 of the Civil Code of the Philippines, respondibility arising from negligence in the performance of every kind of obligation is also demandable, but such liability may be regulated by the courts, according to the circumstances. In quasi-delicts, the contributory negligence of the plaintiff shall reduce the damages that he may recover.42

WHEREFORE, the assailed Decision and Resolution of the Court of Appeals in CA-G.R. CV No. 25017 areAFFIRMED. PCIBank, know formerly as Insular Bank of Asia and America, id declared solely responsible for the loss of the proceeds of Citibank Check No SN 04867 in the amount P4,746,114.41, which shall be paid together with six percent (6%) interest thereon to Ford Philip -pines Inc. from the date when the original complaint was filed until said amount is fully paid.

However, the Decision and Resolution of the Court of Appeals in CA-G.R. No. 28430 are  MODI-FIED as follows: PCIBank and Citibank are adjudged liable for and must share the loss, (concern-ing the proceeds of Citibank Check Numbers SN 10597 and 16508 totalling P12,163,298.10) on a fifty-fifty ratio, and each bank is ORDEREDto pay Ford Philippines Inc. P6,081,649.05, with six percent (6%) interest thereon, from the date the complaint was filed until full payment of said amount.1âwphi1.nêt

Costs against Philippine Commercial International Bank and Citibank N.A.

SO ORDERED.

Bellosillo, Mendoza, Buena, De Leon, Jr., JJ, concur.

G.R. No. 107382/G.R. No. 107612             January 31, 1996

ASSOCIATED BANK, petitioner, vs.HON. COURT OF APPEALS, PROVINCE OF TARLAC and PHILIPPINE NATIONAL BANK, respondents.

x x x x x x x x x x x x x x x x x x x x x

G.R. No. 107612             January 31, 1996

PHILIPPINE NATIONAL BANK, petitioner, vs.HONORABLE COURT OF APPEALS, PROVINCE OF TARLAC, and ASSOCIATED BANK, respondents.

D E C I S I O N

ROMERO, J.:

Where thirty checks bearing forged endorsements are paid, who bears the loss, the drawer, the drawee bank or the collecting bank?

This is the main issue in these consolidated petitions for review assailing the decision of the Court of Appeals in "Province of Tarlac v. Philippine National Bank v. Associated Bank v. Fausto Pangili-nan, et. al." (CA-G.R. No. CV No. 17962). 1

The facts of the case are as follows:

The Province of Tarlac maintains a current account with the Philippine National Bank (PNB) Tarlac Branch where the provincial funds are deposited. Checks issued by the Province are signed by the Provincial Treasurer and countersigned by the Provincial Auditor or the Secretary of the Sangguni-ang Bayan.

A portion of the funds of the province is allocated to the Concepcion Emergency Hospital.  2 The allotment checks for said government hospital are drawn to the order of "Concepcion Emergency Hospital, Concepcion, Tarlac" or "The Chief, Concepcion Emergency Hospital, Concepcion, Tar-lac." The checks are released by the Office of the Provincial Treasurer and received for the hospital by its administrative officer and cashier.

In January 1981, the books of account of the Provincial Treasurer were post-audited by the Provin-cial Auditor. It was then discovered that the hospital did not receive several allotment checks drawn by the Province.

On February 19, 1981, the Provincial Treasurer requested the manager of the PNB to return all of its cleared checks which were issued from 1977 to 1980 in order to verify the regularity of their en-cashment. After the checks were examined, the Provincial Treasurer learned that 30 checks amount-ing to P203,300.00 were encashed by one Fausto Pangilinan, with the Associated Bank acting as collecting bank.

It turned out that Fausto Pangilinan, who was the administrative officer and cashier of payee hospi -tal until his retirement on February 28, 1978, collected the questioned checks from the office of the Provincial Treasurer. He claimed to be assisting or helping the hospital follow up the release of the checks and had official receipts. 3Pangilinan sought to encash the first check 4 with Associated Bank. However, the manager of Associated Bank refused and suggested that Pangilinan deposit the check in his personal savings account with the same bank. Pangilinan was able to withdraw the money when the check was cleared and paid by the drawee bank, PNB.

After forging the signature of Dr. Adena Canlas who was chief of the payee hospital, Pangilinan followed the same procedure for the second check, in the amount of P5,000.00 and dated April 20,

1978, 5 as well as for twenty-eight other checks of various amounts and on various dates. The last check negotiated by Pangilinan was for f8,000.00 and dated February 10, 1981. 6 All the checks bore the stamp of Associated Bank which reads "All prior endorsements guaranteed ASSOCIATED BANK."

Jesus David, the manager of Associated Bank testified that Pangilinan made it appear that the checks were paid to him for certain projects with the hospital. 7 He did not find as irregular the fact that the checks were not payable to Pangilinan but to the Concepcion Emergency Hospital. While he admitted that his wife and Pangilinan's wife are first cousins, the manager denied having given Pangilinan preferential treatment on this account. 8

On February 26, 1981, the Provincial Treasurer wrote the manager of the PNB seeking the restora-tion of the various amounts debited from the current account of the Province. 9

In turn, the PNB manager demanded reimbursement from the Associated Bank on May 15, 1981. 10

As both banks resisted payment, the Province of Tarlac brought suit against PNB which, in turn, impleaded Associated Bank as third-party defendant. The latter then filed a fourth-party complaint against Adena Canlas and Fausto Pangilinan. 11

After trial on the merits, the lower court rendered its decision on March 21, 1988, disposing as fol-lows:

WHEREFORE, in view of the foregoing, judgment is hereby rendered:

1. On the basic complaint, in favor of plaintiff Province of Tarlac and against defendant Philippine National Bank (PNB), ordering the latter to pay to the former, the sum of Two Hundred Three Thousand Three Hundred (P203,300.00) Pesos with legal interest thereon from March 20, 1981 until fully paid;

2. On the third-party complaint, in favor of defendant/third-party plaintiff Philippine Na-tional Bank (PNB) and against third-party defendant/fourth-party plaintiff Associated Bank ordering the latter to reimburse to the former the amount of Two Hundred Three Thousand Three Hundred (P203,300.00) Pesos with legal interests thereon from March 20, 1981 until fully paid;.

3. On the fourth-party complaint, the same is hereby ordered dismissed for lack of cause of action as against fourth-party defendant Adena Canlas and lack of jurisdiction over the person of fourth-party defendant Fausto Pangilinan as against the latter.

4. On the counterclaims on the complaint, third-party complaint and fourth-party com-plaint, the same are hereby ordered dismissed for lack of merit.

SO ORDERED. 12

PNB and Associated Bank appealed to the Court of Appeals. 13 Respondent court affirmed the trial court's decision in toto on September 30, 1992.

Hence these consolidated petitions which seek a reversal of respondent appellate court's decision.

PNB assigned two errors. First, the bank contends that respondent court erred in exempting the Province of Tarlac from liability when, in fact, the latter was negligent because it delivered and re -leased the questioned checks to Fausto Pangilinan who was then already retired as the hospital's cashier and administrative officer. PNB also maintains its innocence and alleges that as between two innocent persons, the one whose act was the cause of the loss, in this case the Province of Tar-lac, bears the loss.

Next, PNB asserts that it was error for the court to order it to pay the province and then seek reim-bursement from Associated Bank. According to petitioner bank, respondent appellate Court should have directed Associated Bank to pay the adjudged liability directly to the Province of Tarlac to avoid circuity. 14

Associated Bank, on the other hand, argues that the order of liability should be totally reversed, with the drawee bank (PNB) solely and ultimately bearing the loss.

Respondent court allegedly erred in applying Section 23 of the Philippine Clearing House Rules in-stead of Central Bank Circular No. 580, which, being an administrative regulation issued pursuant to law, has the force and effect of law. 15 The PCHC Rules are merely contractual stipulations among and between member-banks. As such, they cannot prevail over the aforesaid CB Circular.

It likewise contends that PNB, the drawee bank, is estopped from asserting the defense of guarantee of prior indorsements against Associated Bank, the collecting bank. In stamping the guarantee (for all prior indorsements), it merely followed a mandatory requirement for clearing and had no choice but to place the stamp of guarantee; otherwise, there would be no clearing. The bank will be in a "no-win" situation and will always bear the loss as against the drawee bank. 16

Associated Bank also claims that since PNB already cleared and paid the value of the forged checks in question, it is now estopped from asserting the defense that Associated Bank guaranteed prior in-dorsements. The drawee bank allegedly has the primary duty to verify the genuineness of payee's indorsement before paying the check. 17

While both banks are innocent of the forgery, Associated Bank claims that PNB was at fault and should solely bear the loss because it cleared and paid the forged checks.

xxx       xxx       xxx

The case at bench concerns checks payable to the order of Concepcion Emergency Hospital or its Chief. They were properly issued and bear the genuine signatures of the drawer, the Province of Tarlac. The infirmity in the questioned checks lies in the payee's (Concepcion Emergency Hospital) indorsements which are forgeries. At the time of their indorsement, the checks were order instru -ments.

Checks having forged indorsements should be differentiated from forged checks or checks bearing the forged signature of the drawer.

Section 23 of the Negotiable Instruments Law (NIL) provides:

Sec. 23. FORGED SIGNATURE, EFFECT OF. — When a signature is forged or made without 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 pay -ment 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.

A forged signature, whether it be that of the drawer or the payee, is wholly inoperative and no one can gain title to the instrument through it. A person whose signature to an instrument was forged was never a party and never consented to the contract which allegedly gave rise to such instru-ment. 18 Section 23 does not avoid the instrument but only the forged signature. 19 Thus, a forged indorsement does not operate as the payee's indorsement.

The exception to the general rule in Section 23 is where "a party against whom it is sought to en -force a right is precluded from setting up the forgery or want of authority." Parties who warrant or admit the genuineness of the signature in question and those who, by their acts, silence or negli-gence are estopped from setting up the defense of forgery, are precluded from using this defense.

Indorsers, persons negotiating by delivery and acceptors are warrantors of the genuineness of the signatures on the instrument. 20

In bearer instruments, the signature of the payee or holder is unnecessary to pass title to the instru-ment. Hence, when the indorsement is a forgery, only the person whose signature is forged can raise the defense of forgery against a holder in due course. 21

The checks involved in this case are order instruments, hence, the following discussion is made with reference to the effects of a forged indorsement on an instrument payable to order.

Where the instrument is payable to order at the time of the forgery, such as the checks in this case, the signature of its rightful holder (here, the payee hospital) is essential to transfer title to the same instrument. When the holder's indorsement is forged, all parties prior to the forgery may raise the real defense of forgery against all parties subsequent thereto. 22

An indorser of an order instrument warrants "that the instrument is genuine and in all respects what it purports to be; that he has a good title to it; that all prior parties had capacity to contract; and that the instrument is at the time of his indorsement valid and subsisting." 23 He cannot interpose the defense that signatures prior to him are forged.

A collecting bank where a check is deposited and which indorses the check upon presentment with the drawee bank, is such an indorser. So even if the indorsement on the check deposited by the banks's client is forged, the collecting bank is bound by his warranties as an indorser and cannot set up the defense of forgery as against the drawee bank.

The bank on which a check is drawn, known as the drawee bank, is under strict liability to pay the check to the order of the payee. The drawer's instructions are reflected on the face and by the terms of the check. Payment under a forged indorsement is not to the drawer's order. When the drawee bank pays a person other than the payee, it does not comply with the terms of the check and vio -lates its duty to charge its customer's (the drawer) account only for properly payable items. Since the drawee bank did not pay a holder or other person entitled to receive payment, it has no right to reimbursement from the drawer. 24 The general rule then is that the drawee bank may not debit the drawer's account and is not entitled to indemnification from the drawer. 25 The risk of loss must perforce fall on the drawee bank.

However, if the drawee bank can prove a failure by the customer/drawer to exercise ordinary care that substantially contributed to the making of the forged signature, the drawer is precluded from asserting the forgery.

If at the same time the drawee bank was also negligent to the point of substantially contributing to the loss, then such loss from the forgery can be apportioned between the negligent drawer and the negligent bank. 26

In cases involving a forged check, where the drawer's signature is forged, the drawer can recover from the drawee bank. No drawee bank has a right to pay a forged check. If it does, it shall have to recredit the amount of the check to the account of the drawer. The liability chain ends with the drawee bank whose responsibility it is to know the drawer's signature since the latter is its cus -tomer. 27

In cases involving checks with forged indorsements, such as the present petition, the chain of liabil-ity does not end with the drawee bank. The drawee bank may not debit the account of the drawer but may generally pass liability back through the collection chain to the party who took from the forger and, of course, to the forger himself, if available. 28 In other words, the drawee bank canseek reimbursement or a return of the amount it paid from the presentor bank or per -son. 29 Theoretically, the latter can demand reimbursement from the person who indorsed the

check to it and so on. The loss falls on the party who took the check from the forger, or on the forger himself.

In this case, the checks were indorsed by the collecting bank (Associated Bank) to the drawee bank (PNB). The former will necessarily be liable to the latter for the checks bearing forged indorse-ments. If the forgery is that of the payee's or holder's indorsement, the collecting bank is held liable, without prejudice to the latter proceeding against the forger.

Since a forged indorsement is inoperative, the collecting bank had no right to be paid by the drawee bank. The former must necessarily return the money paid by the latter because it was paid wrong-fully. 30

More importantly, by reason of the statutory warranty of a general indorser in section 66 of the Ne -gotiable Instruments Law, a collecting bank which indorses a check bearing a forged indorsement and presents it to the drawee bank guarantees all prior indorsements, including the forged indorse-ment. It warrants that the instrument is genuine, and that it is valid and subsisting at the time of his indorsement. Because the indorsement is a forgery, the collecting bank commits a breach of this warranty and will be accountable to the drawee bank. This liability scheme operates without regard to fault on the part of the collecting/presenting bank. Even if the latter bank was not negligent, it would still be liable to the drawee bank because of its indorsement.

The Court has consistently ruled that "the collecting bank or last endorser generally suffers the loss because it has the duty to ascertain the genuineness of all prior endorsements considering that the act of presenting the check for payment to the drawee is an assertion that the party making the pre-sentment has done its duty to ascertain the genuineness of the endorsements." 31

The drawee bank is not similarly situated as the collecting bank because the former makes no war-ranty as to the genuineness. of any indorsement. 32 The drawee bank's duty is but to verify the genuineness of the drawer's signature and not of the indorsement because the drawer is its client.

Moreover, the collecting bank is made liable because it is privy to the depositor who negotiated the check. The bank knows him, his address and history because he is a client. It has taken a risk on his deposit. The bank is also in a better position to detect forgery, fraud or irregularity in the indorse-ment.

Hence, the drawee bank can recover the amount paid on the check bearing a forged indorsement from the collecting bank. However, a drawee bank has the duty to promptly inform the presentor of the forgery upon discovery. If the drawee bank delays in informing the presentor of the forgery, thereby depriving said presentor of the right to recover from the forger, the former is deemed negli-gent and can no longer recover from the presentor.33

Applying these rules to the case at bench, PNB, the drawee bank, cannot debit the current account of the Province of Tarlac because it paid checks which bore forged indorsements. However, if the Province of Tarlac as drawer was negligent to the point of substantially contributing to the loss, then the drawee bank PNB can charge its account. If both drawee bank-PNB and drawer-Province of Tarlac were negligent, the loss should be properly apportioned between them.

The loss incurred by drawee bank-PNB can be passed on to the collecting bank-Associated Bank which presented and indorsed the checks to it. Associated Bank can, in turn, hold the forger, Fausto Pangilinan, liable.

If PNB negligently delayed in informing Associated Bank of the forgery, thus depriving the latter of the opportunity to recover from the forger, it forfeits its right to reimbursement and will be made to bear the loss.

After careful examination of the records, the Court finds that the Province of Tarlac was equally negligent and should, therefore, share the burden of loss from the checks bearing a forged indorse-ment.

The Province of Tarlac permitted Fausto Pangilinan to collect the checks when the latter, having al-ready retired from government service, was no longer connected with the hospital. With the excep-tion of the first check (dated January 17, 1978), all the checks were issued and released after Pangilinan's retirement on February 28, 1978. After nearly three years, the Treasurer's office was still releasing the checks to the retired cashier. In addition, some of the aid allotment checks were released to Pangilinan and the others to Elizabeth Juco, the new cashier. The fact that there were now two persons collecting the checks for the hospital is an unmistakable sign of an irregularity which should have alerted employees in the Treasurer's office of the fraud being committed. There is also evidence indicating that the provincial employees were aware of Pangilinan's retirement and consequent dissociation from the hospital. Jose Meru, the Provincial Treasurer, testified:.

ATTY. MORGA:

Q Now, is it true that for a given month there were two releases of checks, one went to Mr. Pangilinan and one went to Miss Juco?

JOSE MERU:

A Yes, sir.

Q Will you please tell us how at the time (sic) when the authorized representative of Con-cepcion Emergency Hospital is and was supposed to be Miss Juco?

A Well, as far as my investigation show (sic) the assistant cashier told me that Pangilinan represented himself as also authorized to help in the release of these checks and we were apparently misled because they accepted the representation of Pangilinan that he was helping them in the release of the checks and besides according to them they were, Pangilinan, like the rest, was able to present an official receipt to acknowledge these re -ceipts and according to them since this is a government check and believed that it will eventually go to the hospital following the standard procedure of negotiating government checks, they released the checks to Pangilinan aside from Miss Juco.34

The failure of the Province of Tarlac to exercise due care contributed to a significant degree to the loss tantamount to negligence. Hence, the Province of Tarlac should be liable for part of the total amount paid on the questioned checks.

The drawee bank PNB also breached its duty to pay only according to the terms of the check. Hence, it cannot escape liability and should also bear part of the loss.

As earlier stated, PNB can recover from the collecting bank.

In the case of Associated Bank v. CA, 35 six crossed checks with forged indorsements were de-posited in the forger's account with the collecting bank and were later paid by four different drawee banks. The Court found the collecting bank (Associated) to be negligent and held:

The Bank should have first verified his right to endorse the crossed checks, of which he was not the payee, and to deposit the proceeds of the checks to his own account. The Bank was by reason of the nature of the checks put upon notice that they were issued for deposit only to the private respondent's account. . . .

The situation in the case at bench is analogous to the above case, for it was not the payee who de-posited the checks with the collecting bank. Here, the checks were all payable to Concepcion Emer-

gency Hospital but it was Fausto Pangilinan who deposited the checks in his personal savings ac-count.

Although Associated Bank claims that the guarantee stamped on the checks (All prior and/or lack of endorsements guaranteed) is merely a requirement forced upon it by clearing house rules, it can-not but remain liable. The stamp guaranteeing prior indorsements is not an empty rubric which a bank must fulfill for the sake of convenience. A bank is not required to accept all the checks negoti-ated to it. It is within the bank's discretion to receive a check for no banking institution would con -sciously or deliberately accept a check bearing a forged indorsement. When a check is deposited with the collecting bank, it takes a risk on its depositor. It is only logical that this bank be held ac-countable for checks deposited by its customers.

A delay in informing the collecting bank (Associated Bank) of the forgery, which deprives it of the opportunity to go after the forger, signifies negligence on the part of the drawee bank (PNB) and will preclude it from claiming reimbursement.

It is here that Associated Bank's assignment of error concerning C.B. Circular No. 580 and Section 23 of the Philippine Clearing House Corporation Rules comes to fore. Under Section 4(c) of CB Circular No. 580, items bearing a forged endorsement shall be returned within twenty-Sour (24) hours after discovery of the forgery but in no event beyond the period fixed or provided by law for filing of a legal action by the returning bank. Section 23 of the PCHC Rules deleted the require-ment that items bearing a forged endorsement should be returned within twenty-four hours. Associ-ated Bank now argues that the aforementioned Central Bank Circular is applicable. Since PNB did not return the questioned checks within twenty-four hours, but several days later, Associated Bank alleges that PNB should be considered negligent and not entitled to reimbursement of the amount it paid on the checks.

The Court deems it unnecessary to discuss Associated Bank's assertions that CB Circular No. 580 is an administrative regulation issued pursuant to law and as such, must prevail over the PCHC rule. The Central Bank circular was in force for all banks until June 1980 when the Philippine Clearing House Corporation (PCHC) was set up and commenced operations. Banks in Metro Manila were covered by the PCHC while banks located elsewhere still had to go through Central Bank Clearing. In any event, the twenty-four-hour return rule was adopted by the PCHC until it was changed in 1982. The contending banks herein, which are both branches in Tarlac province, are therefore not covered by PCHC Rules but by CB Circular No. 580. Clearly then, the CB circular was applicable when the forgery of the checks was discovered in 1981.

The rule mandates that the checks be returned within twenty-four hours after discovery of the forgery but in no event beyond the period fixed by law for filing a legal action. The rationale of the rule is to give the collecting bank (which indorsed the check) adequate opportunity to proceed against the forger. If prompt notice is not given, the collecting bank maybe prejudiced and lose the opportunity to go after its depositor.

The Court finds that even if PNB did not return the questioned checks to Associated Bank within twenty-four hours, as mandated by the rule, PNB did not commit negligent delay. Under the cir-cumstances, PNB gave prompt notice to Associated Bank and the latter bank was not prejudiced in going after Fausto Pangilinan. After the Province of Tarlac informed PNB of the forgeries, PNB necessarily had to inspect the checks and conduct its own investigation. Thereafter, it requested the Provincial Treasurer's office on March 31, 1981 to return the checks for verification. The Province of Tarlac returned the checks only on April 22, 1981. Two days later, Associated Bank received the checks from PNB. 36

Associated Bank was also furnished a copy of the Province's letter of demand to PNB dated March 20, 1981, thus giving it notice of the forgeries. At this time, however, Pangilinan's account with As-sociated had only P24.63 in it.37 Had Associated Bank decided to debit Pangilinan's account, it

could not have recovered the amounts paid on the questioned checks. In addition, while Associated Bank filed a fourth-party complaint against Fausto Pangilinan, it did not present evidence against Pangilinan and even presented him as its rebuttal witness. 38 Hence, Associated Bank was not prejudiced by PNB's failure to comply with the twenty-four-hour return rule.

Next, Associated Bank contends that PNB is estopped from requiring reimbursement because the latter paid and cleared the checks. The Court finds this contention unmeritorious. Even if PNB cleared and paid the checks, it can still recover from Associated Bank. This is true even if the payee's Chief Officer who was supposed to have indorsed the checks is also a customer of the drawee bank. 39 PNB's duty was to verify the genuineness of the drawer's signature and not the genuineness of payee's indorsement. Associated Bank, as the collecting bank, is the entity with the duty to verify the genuineness of the payee's indorsement.

PNB also avers that respondent court erred in adjudging circuitous liability by directing PNB to re-turn to the Province of Tarlac the amount of the checks and then directing Associated Bank to reim-burse PNB. The Court finds nothing wrong with the mode of the award. The drawer, Province of Tarlac, is a clientor customer of the PNB, not of Associated Bank. There is no privity of contract between the drawer and the collecting bank.

The trial court made PNB and Associated Bank liable with legal interest from March 20, 1981, the date of extrajudicial demand made by the Province of Tarlac on PNB. The payments to be made in this case stem from the deposits of the Province of Tarlac in its current account with the PNB. Bank deposits are considered under the law as loans. 40 Central Bank Circular No. 416 prescribes a twelve percent (12%) interest per annum for loans, forebearance of money, goods or credits in the absence of express stipulation. Normally, current accounts are likewise interest-bearing, by express contract, thus excluding them from the coverage of CB Circular No. 416. In this case, however, the actual interest rate, if any, for the current account opened by the Province of Tarlac with PNB was not given in evidence. Hence, the Court deems it wise to affirm the trial court's use of the legal in-terest rate, or six percent (6%) per annum. The interest rate shall be computed from the date of de-fault, or the date of judicial or extrajudicial demand. 41 The trial court did not err in granting legal interest from March 20, 1981, the date of extrajudicial demand.

The Court finds as reasonable, the proportionate sharing of fifty percent - fifty percent (50%-50%). Due to the negligence of the Province of Tarlac in releasing the checks to an unauthorized person (Fausto Pangilinan), in allowing the retired hospital cashier to receive the checks for the payee hos -pital for a period close to three years and in not properly ascertaining why the retired hospital cashier was collecting checks for the payee hospital in addition to the hospital's real cashier, re -spondent Province contributed to the loss amounting to P203,300.00 and shall be liable to the PNB for fifty (50%) percent thereof. In effect, the Province of Tarlac can only recover fifty percent (50%) of P203,300.00 from PNB.

The collecting bank, Associated Bank, shall be liable to PNB for fifty (50%) percent of P203,300.00. It is liable on its warranties as indorser of the checks which were deposited by Fausto Pangilinan, having guaranteed the genuineness of all prior indorsements, including that of the chief of the payee hospital, Dr. Adena Canlas. Associated Bank was also remiss in its duty to ascertain the genuineness of the payee's indorsement.

IN VIEW OF THE FOREGOING, the petition for review filed by the Philippine National Bank (G.R. No. 107612) is hereby PARTIALLY GRANTED. The petition for review filed by the Associ-ated Bank (G.R. No. 107382) is hereby DENIED. The decision of the trial court is MODIFIED. The Philippine National Bank shall pay fifty percent (50%) of P203,300.00 to the Province of Tar-lac, with legal interest from March 20, 1981 until the payment thereof. Associated Bank shall pay fifty percent (50%) of P203,300.00 to the Philippine National Bank, likewise, with legal interest from March 20, 1981 until payment is made.

SO ORDERED.

Regalado, Puno and Mendoza, JJ., concur

G.R. No. 74886 December 8, 1992

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

 

DAVIDE, JR., J.:

Petitioner seeks to review and set aside the decision 1 of public respondent; Intermediate Appellate Court (now Court of Appeals), dated 10 March 1986, in AC-G.R. No. 66733 which affirmed in toto the 15 June 1978 decision of Branch 9 (Quezon City) of the then Court of First Instance (now Regional Trial Court) of Rizal in Civil Case No. Q-19312. The latter involved an action instituted by the petitioner for the recovery of a sum of money representing the amount paid by it to the Nis-sho Company Ltd. of Japan for textile machinery imported by the defendant, now private respon-dent, Philippine Rayon Mills, Inc. (hereinafter Philippine Rayon), represented by co-defendant Anacleto R. Chi.

The facts which gave rise to the instant controversy are summarized by the public respondent as follows:

On August 8, 1962, defendant-appellant Philippine Rayon Mills, Inc. entered into a contract with Nissho Co., Ltd. of Japan for the importation of textile ma-chineries under a five-year deferred payment plan (Exhibit B, Plaintiff's Folder of Exhibits, p 2). To effect payment for said machineries, the defendant-appel-lant applied for a commercial letter of credit with the Prudential Bank and Trust Company in favor of Nissho. By virtue of said application, the Prudential Bank opened Letter of Credit No. DPP-63762 for $128,548.78 (Exhibit A, Ibid., p. 1). Against this letter of credit, drafts were drawn and issued by Nissho (Exhibits X, X-1 to X-11, Ibid., pp. 65, 66 to 76), which were all paid by the Prudential Bank through its correspondent in Japan, the Bank of Tokyo, Ltd. As indicated on their faces, two of these drafts (Exhibit X and X-1, Ibid., pp. 65-66) were ac-cepted by the defendant-appellant through its president, Anacleto R. Chi, while the others were not (Exhibits X-2 to X-11, Ibid., pp. 66 to 76).

Upon the arrival of the machineries, the Prudential Bank indorsed the shipping documents to the defendant-appellant which accepted delivery of the same. To enable the defendant-appellant to take delivery of the machineries, it executed, by prior arrangement with the Prudential Bank, a trust receipt which was signed by Anacleto R. Chi in his capacity as President (sic) of defendant-appellant company (Exhibit C, Ibid., p. 13).

At the back of the trust receipt is a printed form to be accomplished by two sureties who, by the very terms and conditions thereof, were to be jointly and severally liable to the Prudential Bank should the defendant-appellant fail to pay the total amount or any portion of the drafts issued by Nissho and paid for by Prudential Bank. The defendant-appellant was able to take delivery of the textile machineries and installed the same at its factory site at 69 Obudan Street, Quezon City.

Sometime in 1967, the defendant-appellant ceased business operation (sic). On December 29, 1969, defendant-appellant's factory was leased by Yupangco Cot-ton Mills for an annual rental of P200,000.00 (Exhibit I, Ibid., p. 22). The lease was renewed on January 3, 1973 (Exhibit J, Ibid., p. 26). On January 5, 1974, all the textile machineries in the defendant-appellant's factory were sold to AIC Development Corporation for P300,000.00 (Exhibit K, Ibid., p. 29).

The obligation of the defendant-appellant arising from the letter of credit and the trust receipt remained unpaid and unliquidated. Repeated formal demands (Exhibits U, V, and W, Ibid., pp. 62, 63, 64) for the payment of the said trust re-ceipt yielded no result Hence, the present action for the collection of the princi-pal amount of P956,384.95 was filed on October 3, 1974 against the defendant-appellant and Anacleto R. Chi. In their respective answers, the defendants inter-posed identical special defenses, viz., the complaint states no cause of action; if there is, the same has prescribed; and the plaintiff is guilty of laches. 2

On 15 June 1978, the trial court rendered its decision the dispositive portion of which reads:

WHEREFORE, judgment is hereby rendered sentencing the defendant Philip-pine Rayon Mills, Inc. to pay plaintiff the sum of P153,645.22, the amounts due under Exhibits "X" & "X-1", with interest at 6% per annum beginning Septem-ber 15, 1974 until fully paid.

Insofar as the amounts involved in drafts Exhs. "X" (sic) to "X-11", inclusive, the same not having been accepted by defendant Philippine Rayon Mills, Inc., plaintiff's cause of action thereon has not accrued, hence, the instant case is pre-mature.

Insofar as defendant Anacleto R. Chi is concerned, the case is dismissed. Plain-tiff is ordered to pay defendant Anacleto R. Chi the sum of P20,000.00 as attor-ney's fees.

With costs against defendant Philippine Rayon Mills, Inc.

SO ORDERED. 3

Petitioner appealed the decision to the then Intermediate Appellate Court. In urging the said court to reverse or modify the decision, petitioner alleged in its Brief that the trial court erred in (a) disre-garding its right to reimbursement from the private respondents for the entire unpaid balance of the imported machines, the total amount of which was paid to the Nissho Company Ltd., thereby vio -lating the principle of the third party payor's right to reimbursement provided for in the second paragraph of Article 1236 of the Civil Code and under the rule against unjust enrichment; (b) refus-ing to hold Anacleto R. Chi, as the responsible officer of defendant corporation, liable under Sec-tion 13 of P.D No 115 for the entire unpaid balance of the imported machines covered by the bank's trust receipt (Exhibit "C"); (c) finding that the solidary guaranty clause signed by Anacleto R. Chi is not a guaranty at all; (d) controverting the judicial admissions of Anacleto R. Chi that he is at least a simple guarantor of the said trust receipt obligation; (e) contravening, based on the assumption that Chi is a simple guarantor, Articles 2059, 2060 and 2062 of the Civil Code and the related evi-dence and jurisprudence which provide that such liability had already attached; (f) contravening the judicial admissions of Philippine Rayon with respect to its liability to pay the petitioner the amounts involved in the drafts (Exhibits "X", "X-l" to "X-11''); and (g) interpreting "sight" drafts as requiring acceptance by Philippine Rayon before the latter could be held liable thereon. 4

In its decision, public respondent sustained the trial court in all respects. As to the first and last as-signed errors, it ruled that the provision on unjust enrichment, Article 2142 of the Civil Code, ap-

plies only if there is no express contract between the parties and there is a clear showing that the payment is justified. In the instant case, the relationship existing between the petitioner and Philip-pine Rayon is governed by specific contracts, namely the application for letters of credit, the prom -issory note, the drafts and the trust receipt. With respect to the last ten (10) drafts (Exhibits "X-2" to "X-11") which had not been presented to and were not accepted by Philippine Rayon, petitioner was not justified in unilaterally paying the amounts stated therein. The public respondent did not agree with the petitioner's claim that the drafts were sight drafts which did not require presentment for acceptance to Philippine Rayon because paragraph 8 of the trust receipt presupposes prior ac-ceptance of the drafts. Since the ten (10) drafts were not presented and accepted, no valid demand for payment can be made.

Public respondent also disagreed with the petitioner's contention that private respondent Chi is soli -darily liable with Philippine Rayon pursuant to Section 13 of P.D. No. 115 and based on his signa-ture on the solidary guaranty clause at the dorsal side of the trust receipt. As to the first contention, the public respondent ruled that the civil liability provided for in said Section 13 attaches only after conviction. As to the second, it expressed misgivings as to whether Chi's signature on the trust re-ceipt made the latter automatically liable thereon because the so-called solidary guaranty clause at the dorsal portion of the trust receipt is to be signed not by one (1) person alone, but by two (2) per-sons; the last sentence of the same is incomplete and unsigned by witnesses; and it is not acknowl-edged before a notary public. Besides, even granting that it was executed and acknowledged before a notary public, Chi cannot be held liable therefor because the records fail to show that petitioner had either exhausted the properties of Philippine Rayon or had resorted to all legal remedies as re-quired in Article 2058 of the Civil Code. As provided for under Articles 2052 and 2054 of the Civil Code, the obligation of a guarantor is merely accessory and subsidiary, respectively. Chi's liability would therefore arise only when the principal debtor fails to comply with his obligation. 5

Its motion to reconsider the decision having been denied by the public respondent in its Resolution of 11 June 1986, 6 petitioner filed the instant petition on 31 July 1986 submitting the following le -gal issues:

I. WHETHER OR NOT THE RESPONDENT APPELLATE COURT GRIEV-OUSLY ERRED IN DENYING PETITIONER'S CLAIM FOR FULL REIM-BURSEMENT AGAINST THE PRIVATE RESPONDENTS FOR THE PAY-MENT PETITIONER MADE TO NISSHO CO. LTD. FOR THE BENEFIT OF PRIVATE RESPONDENT UNDER ART. 1283 OF THE NEW CIVIL CODE OF THE PHILIPPINES AND UNDER THE GENERAL PRINCIPLE AGAINST UNJUST ENRICHMENT;

II. WHETHER OR NOT RESPONDENT CHI IS SOLIDARILY LIABLE UN-DER THE TRUST RECEIPT (EXH. C);

III. WHETHER OR NOT ON THE BASIS OF THE JUDICIAL ADMISSIONS OF RESPONDENT CHI HE IS LIABLE THEREON AND TO WHAT EX-TENT;

IV. WHETHER OR NOT RESPONDENT CHI IS MERELY A SIMPLE GUARANTOR; AND IF SO; HAS HIS LIABILITY AS SUCH ALREADY ATTACHED;

V. WHETHER OR NOT AS THE SIGNATORY AND RESPONSIBLE OFFI-CER OF RESPONDENT PHIL. RAYON RESPONDENT CHI IS PERSON-ALLY LIABLE PURSUANT TO THE PROVISION OF SECTION 13, P.D. 115;

VI. WHETHER OR NOT RESPONDENT PHIL. RAYON IS LIABLE TO THE PETITIONER UNDER THE TRUST RECEIPT (EXH. C);

VII. WHETHER OR NOT ON THE BASIS OF THE JUDICIAL ADMIS-SIONS RESPONDENT PHIL. RAYON IS LIABLE TO THE PETITIONER UNDER THE DRAFTS (EXHS. X, X-1 TO X-11) AND TO WHAT EXTENT;

VIII. WHETHER OR NOT SIGHT DRAFTS REQUIRE PRIOR ACCEP-TANCE FROM RESPONDENT PHIL. RAYON BEFORE THE LATTER BE-COMES LIABLE TO PETITIONER. 7

In the Resolution of 12 March 1990, 8 this Court gave due course to the petition after the filing of the Comment thereto by private respondent Anacleto Chi and of the Reply to the latter by the peti-tioner; both parties were also required to submit their respective memoranda which they subse-quently complied with.

As We see it, the issues may be reduced as follows:

1. Whether presentment for acceptance of the drafts was in-dispensable to make Philippine Rayon liable thereon;

2. Whether Philippine Rayon is liable on the basis of the trust receipt;

3. Whether private respondent Chi is jointly and severally li-able with Philippine Rayon for the obligation sought to be enforced and if not, whether he may be considered a guaran-tor; in the latter situation, whether the case should have been dismissed on the ground of lack of cause of action as there was no prior exhaustion of Philippine Rayon's properties.

Both the trial court and the public respondent ruled that Philippine Rayon could be held liable for the two (2) drafts, Exhibits "X" and "X-1", because only these appear to have been accepted by the latter after due presentment. The liability for the remaining ten (10) drafts (Exhibits "X-2" to "X-11" inclusive) did not arise because the same were not presented for acceptance. In short, both courts concluded that acceptance of the drafts by Philippine Rayon was indispensable to make the latter liable thereon. We are unable to agree with this proposition. The transaction in the case at bar stemmed from Philippine Rayon's application for a commercial letter of credit with the petitioner in the amount of $128,548.78 to cover the former's contract to purchase and import loom and textile machinery from Nissho Company, Ltd. of Japan under a five-year deferred payment plan. Petitioner approved the application. As correctly ruled by the trial court in its Order of 6 March 1975: 9

. . . By virtue of said Application and Agreement for Commercial Letter of Credit, plaintiff bank 10 was under obligation to pay through its correspondent bank in Japan the drafts that Nisso (sic) Company, Ltd., periodically drew against said letter of credit from 1963 to 1968, pursuant to plaintiff's contract with the defendant Philippine Rayon Mills, Inc. In turn, defendant Philippine Rayon Mills, Inc., was obligated to pay plaintiff bank the amounts of the drafts drawn by Nisso (sic) Company, Ltd. against said plaintiff bank together with any accruing commercial charges, interest, etc. pursuant to the terms and condi-tions stipulated in the Application and Agreement of Commercial Letter of Credit Annex "A".

A letter of credit is defined as an engagement by a bank or other person made at the request of a customer that the issuer will honor drafts or other demands for payment upon compliance with the conditions specified in the credit. 11 Through a letter of credit, the bank merely substitutes its own

promise to pay for one of its customers who in return promises to pay the bank the amount of funds mentioned in the letter of credit plus credit or commitment fees mutually agreed upon. 12 In the in-stant case then, the drawee was necessarily the herein petitioner. It was to the latter that the drafts were presented for payment. In fact, there was no need for acceptance as the issued drafts are sight drafts. Presentment for acceptance is necessary only in the cases expressly provided for in Section 143 of the Negotiable Instruments Law (NIL). 13 The said section reads:

Sec. 143. When presentment for acceptance must be made. — Presentment for acceptance must be made:

(a) Where the bill is payable after sight, or in any other case, where presentment for acceptance is necessary in order to fix the maturity of the instrument; or

(b) Where the bill expressly stipulates that it shall be presented for acceptance; or

(c) Where the bill is drawn payable else-where than at the residence or place of business of the drawee.

In no other case is presentment for acceptance necessary in order to render any party to the bill liable.

Obviously then, sight drafts do not require presentment for acceptance.

The acceptance of a bill is the signification by the drawee of his assent to the order of the drawer; 14 this may be done in writing by the drawee in the bill itself, or in a separate instru-ment. 15

The parties herein agree, and the trial court explicitly ruled, that the subject, drafts are sight drafts. Said the latter:

. . . In the instant case the drafts being at sight, they are supposed to be payable upon acceptance unless plaintiff bank has given the Philippine Rayon Mills Inc. time within which to pay the same. The first two drafts (Annexes C & D, Exh. X & X-1) were duly accepted as indicated on their face (sic), and upon such ac-ceptance should have been paid forthwith. These two drafts were not paid and although Philippine Rayon Millsought to have paid the same, the fact remains that until now they are still un -paid. 16

Corollarily, they are, pursuant to Section 7 of the NIL, payable on demand. Section 7 provides:

Sec. 7. When payable on demand. — An instrument is payable on demand —

(a) When so it is expressed to be payable on demand, or at sight, or on presenta-tion; or

(b) In which no time for payment in ex-pressed.

Where an instrument is issued, accepted, or indorsed when overdue, it is, as re-gards the person so issuing, accepting, or indorsing it, payable on demand. (em-phasis supplied)

Paragraph 8 of the Trust Receipt which reads: "My/our liability for payment at maturity of any accepted draft, bill of exchange or indebtedness shall not be extinguished or modi-fied" 17 does not, contrary to the holding of the public respondent, contemplate prior ac-ceptance by Philippine Rayon, but by the petitioner. Acceptance, however, was not even necessary in the first place because the drafts which were eventually issued were sight drafts And even if these were not sight drafts, thereby necessitating acceptance, it would be the petitioner — and not Philippine Rayon — which had to accept the same for the lat -ter was not the drawee. Presentment for acceptance is defined an the production of a bill of exchange to a drawee for acceptance. 18 The trial court and the public respondent, therefore, erred in ruling that presentment for acceptance was an indispensable requisite for Philippine Rayon's liability on the drafts to attach. Contrary to both courts' pronounce-ments, Philippine Rayon immediately became liable thereon upon petitioner's payment thereof. Such is the essence of the letter of credit issued by the petitioner. A different con-clusion would violate the principle upon which commercial letters of credit are founded because in such a case, both the beneficiary and the issuer, Nissho Company Ltd. and the petitioner, respectively, would be placed at the mercy of Philippine Rayon even if the lat-ter had already received the imported machinery and the petitioner had fully paid for it. The typical setting and purpose of a letter of credit are described in Hibernia Bank and Trust Co. vs. J. Aron & Co., Inc., 19 thus:

Commercial letters of credit have come into general use in international sales transactions where much time necessarily elapses between the sale and the re-ceipt by a purchaser of the merchandise, during which interval great price changes may occur. Buyers and sellers struggle for the advantage of position. The seller is desirous of being paid as surely and as soon as possible, realizing that the vendee at a distant point has it in his power to reject on trivial grounds merchandise on arrival, and cause considerable hardship to the shipper. Letters of credit meet this condition by affording celerity and certainty of payment. Their purpose is to insure to a seller payment of a definite amount upon presen-tation of documents. The bank deals only with documents. It has nothing to do with the quality of the merchandise. Disputes as to the merchandise shipped may arise and be litigated later between vendor and vendee, but they may not impede acceptance of drafts and payment by the issuing bank when the proper documents are presented.

The trial court and the public respondent likewise erred in disregarding the trust receipt and in not holding that Philippine Rayon was liable thereon. In People vs. Yu Chai Ho, 20 this Court explains the nature of a trust receipt by quoting In re Dunlap Carpet Co., 21 thus:

By this arrangement a banker advances money to an intending importer, and thereby lends the aid of capital, of credit, or of business facilities and agencies abroad, to the enterprise of foreign commerce. Much of this trade could hardly be carried on by any other means, and therefore it is of the first importance that the fundamental factor in the transaction, the banker's advance of money and credit, should receive the amplest protection. Accordingly, in order to secure that the banker shall be repaid at the critical point — that is, when the imported goods finally reach the hands of the intended vendee — the banker takes the full title to the goods at the very beginning; he takes it as soon as the goods are bought and settled for by his payments or acceptances in the foreign country, and he continues to hold that title as his indispensable security until the goods are sold in the United States and the vendee is called upon to pay for them. This security is not an ordinary pledge by the importer to the banker, for the importer has never owned the goods, and moreover he is not able to deliver the posses-

sion; but the security is the complete title vested originally in the bankers, and this characteristic of the transaction has again and again been recognized and protected by the courts. Of course, the title is at bottom a security title, as it has sometimes been called, and the banker is always under the obligation to recon-vey; but only after his advances have been fully repaid and after the importer has fulfilled the other terms of the contract.

As further stated in National Bank vs. Viuda e Hijos de Angel Jose, 22 trust receipts:

. . . [I]n a certain manner, . . . partake of the nature of a conditional sale as pro-vided by the Chattel Mortgage Law, that is, the importer becomes absolute owner of the imported merchandise as soon an he has paid its price. The owner-ship of the merchandise continues to be vested in the owner thereof or in the person who has advanced payment, until he has been paid in full, or if the mer-chandise has already been sold, the proceeds of the sale should be turned over to him by the importer or by his representative or successor in interest.

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

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

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

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

PHILIPPINE RAYON MILLS, INC.

We further agree that the PRUDENTIAL BANK AND TRUST COMPANY does not have to take any steps or exhaust its remedy against aforesaid:

before making demand on me/us.

(Sgd.) Anacleto R. ChiANACLETO R. CHI 26

Petitioner insists that by virtue of the clear wording of the statement, specifically the clause ". . . we jointly and severally agree and undertake . . .," and the concluding sentence on exhaustion, Chi's li -ability therein is solidary.

In holding otherwise, the public respondent ratiocinates as follows:

With respect to the second argument, we have our misgivings as to whether the mere signature of defendant-appellee Chi of (sic) the guaranty agreement, Ex-hibit "C-1", will make it an actionable document. It should be noted that Exhibit "C-1" was prepared and printed by the plaintiff-appellant. A perusal of Exhibit "C-1" shows that it was to be signed and executed by two persons. It was signed only by defendant-appellee Chi. Exhibit "C-1" was to be witnessed by two per-sons, but no one signed in that capacity. The last sentence of the guaranty clause is incomplete. Furthermore, the plaintiff-appellant also failed to have the pur-ported guarantee clause acknowledged before a notary public. All these show that the alleged guaranty provision was disregarded and, therefore, not consum-mated.

But granting arguendo that the guaranty provision in Exhibit "C-1" was fully executed and acknowledged still defendant-appellee Chi cannot be held liable thereunder because the records show that the plaintiff-appellant had neither ex-hausted the property of the defendant-appellant nor had it resorted to all legal remedies against the said defendant-appellant as provided in Article 2058 of the Civil Code. The obligation of a guarantor is merely accessory under Article 2052 of the Civil Code and subsidiary under Article 2054 of the Civil Code. Therefore, the liability of the defendant-appellee arises only when the principal debtor fails to comply with his obligation. 27

Our own reading of the questioned solidary guaranty clause yields no other conclusion than that the obligation of Chi is only that of a guarantor. This is further bolstered by the last sentence which speaks of waiver of exhaustion, which, nevertheless, is ineffective in this case because the space therein for the party whose property may not be exhausted was not filled up. Under Article 2058 of the Civil Code, the defense of exhaustion (excussion) may be raised by a guarantor before he may be held liable for the obligation. Petitioner likewise admits that the questioned provision is a sol-idary guaranty clause, thereby clearly distinguishing it from a contract of surety. It, however, de-scribed the guaranty as solidary between the guarantors; this would have been correct if two (2) guarantors had signed it. The clause "we jointly and severally agree and undertake" refers to the un-dertaking of the two (2) parties who are to sign it or to the liability existing between themselves. It does not refer to the undertaking between either one or both of them on the one hand and the peti-tioner on the other with respect to the liability described under the trust receipt. Elsewise stated, their liability is not divisible as between them, i.e., it can be enforced to its full extent against any one of them.

Furthermore, any doubt as to the import, or true intent of the solidary guaranty clause should be re-solved against the petitioner. The trust receipt, together with the questioned solidary guaranty clause, is on a form drafted and prepared solely by the petitioner; Chi's participation therein is lim-ited to the affixing of his signature thereon. It is, therefore, a contract of adhesion;  28 as such, it must be strictly construed against the party responsible for its preparation. 29

Neither can We agree with the reasoning of the public respondent that this solidary guaranty clause was effectively disregarded simply because it was not signed and witnessed by two (2) persons and acknowledged before a notary public. While indeed, the clause ought to have been signed by two (2) guarantors, the fact that it was only Chi who signed the same did not make his act an idle cere-mony or render the clause totally meaningless. By his signing, Chi became the sole guarantor. The

attestation by witnesses and the acknowledgement before a notary public are not required by law to make a party liable on the instrument. The rule is that contracts shall be obligatory in whatever form they may have been entered into, provided all the essential requisites for their validity are present; however, when the law requires that a contract be in some form in order that it may be valid or enforceable, or that it be proved in a certain way, that requirement is absolute and indis -pensable. 30 With respect to a guaranty, 31 which is a promise to answer for the debt or default of another, the law merely requires that it, or some note or memorandum thereof, be in writing. Other-wise, it would be unenforceable unless ratified. 32 While the acknowledgement of a surety before a notary public is required to make the same a public document, under Article 1358 of the Civil Code, a contract of guaranty does not have to appear in a public document.

And now to the other ground relied upon by the petitioner as basis for the solidary liability of Chi, namely the criminal proceedings against the latter for the violation of P.D. No. 115. Petitioner claims that because of the said criminal proceedings, Chi would be answerable for the civil liability arising therefrom pursuant to Section 13 of P.D. No. 115. Public respondent rejected this claim be-cause such civil liability presupposes prior conviction as can be gleaned from the phrase "without prejudice to the civil liability arising from the criminal offense." Both are wrong. The said section reads:

Sec. 13. Penalty Clause. — The failure of an entrustee to turn over the proceeds of the sale of the goods, documents or instruments covered by a trust receipt to the extent of the amount owing to the entruster or as appears in the trust receipt or to return said goods, documents or instruments if they were not sold or dis-posed of in accordance with the terms of the trust receipt shall constitute the crime of estafa, punishable under the provisions of Article Three hundred and fifteen, paragraph one (b) of Act Numbered Three thousand eight hundred and fifteen, as amended, otherwise known as the Revised Penal Code. If the viola-tion or offense is committed by a corporation, partnership, association or other juridical entities, the penalty provided for in this Decree shall be imposed upon the directors, officers, employees or other officials or persons therein responsi-ble for the offense, without prejudice to the civil liabilities arising from the criminal offense.

A close examination of the quoted provision reveals that it is the last sentence which provides for the correct solution. It is clear that if the violation or offense is committed by a corporation, partner-ship, association or other juridical entities, the penalty shall be imposed upon the directors, officers, employees or other officials or persons therein responsible for the offense. The penalty referred to is imprisonment, the duration of which would depend on the amount of the fraud as provided for in Article 315 of the Revised Penal Code. The reason for this is obvious: corporations, partnerships, associations and other juridical entities cannot be put in jail. However, it is these entities which are made liable for the civil liability arising from the criminal offense. This is the import of the clause "without prejudice to the civil liabilities arising from the criminal offense." And, as We stated ear-lier, since that violation of a trust receipt constitutes fraud under Article 33 of the Civil Code, peti -tioner was acting well within its rights in filing an independent civil action to enforce the civil lia -bility arising therefrom against Philippine Rayon.

The remaining issue to be resolved concerns the propriety of the dismissal of the case against pri -vate respondent Chi. The trial court based the dismissal, and the respondent Court its affirmance thereof, on the theory that Chi is not liable on the trust receipt in any capacity — either as surety or as guarantor — because his signature at the dorsal portion thereof was useless; and even if he could be bound by such signature as a simple guarantor, he cannot, pursuant to Article 2058 of the Civil Code, be compelled to pay untilafter petitioner has exhausted and resorted to all legal remedies against the principal debtor, Philip-

pine Rayon. The records fail to show that petitioner had done so 33 Reliance is thus placed on Arti-cle 2058 of the Civil Code which provides:

Art. 2056. The guarantor cannot be compelled to pay the creditor unless the lat-ter has exhausted all the property of the debtor, and has resorted to all the legal remedies against the debtor.

Simply stated, there is as yet no cause of action against Chi.

We are not persuaded. Excussion is not a condition sine qua non for the institution of an action against a guarantor. In Southern Motors, Inc. vs. Barbosa, 34 this Court stated:

4. Although an ordinary personal guarantor — not a mortgagor or pledgor — may demand the aforementioned exhaustion, the creditor may, prior thereto, se-cure a judgment against said guarantor, who shall be entitled, however, to a de-ferment of the execution of said judgment against him until after the properties of the principal debtor shall have been exhausted to satisfy the obligation in-volved in the case.

There was then nothing procedurally objectionable in impleading private respondent Chi as a co-defendant in Civil Case No. Q-19312 before the trial court. As a matter of fact, Section 6, Rule 3 of the Rules of Court on permissive joinder of parties explicitly allows it. It reads:

Sec. 6. Permissive joinder of parties. — All persons in whom or against whom any right to relief in respect to or arising out of the same transaction or series of transactions is alleged to exist, whether jointly, severally, or in the alternative, may, except as otherwise provided in these rules, join as plaintiffs or be joined as defendants in one complaint, where any question of law or fact common to all such plaintiffs or to all such defendants may arise in the action; but the court may make such orders as may be just to prevent any plaintiff or defendant from being embarrassed or put to expense in connection with any proceedings in which he may have no interest.

This is the equity rule relating to multifariousness. It is based on trial convenience and is designed to permit the joinder of plaintiffs or defendants whenever there is a common question of law or fact. It will save the parties unnecessary work, trouble and expense. 35

However, Chi's liability is limited to the principal obligation in the trust receipt plus all the acces-sories thereof including judicial costs; with respect to the latter, he shall only be liable for those costs incurred after being judicially required to pay. 36 Interest and damages, being accessories of the principal obligation, should also be paid; these, however, shall run only from the date of the fil-ing of the complaint. Attorney's fees may even be allowed in appropriate cases. 37

In the instant case, the attorney's fees to be paid by Chi cannot be the same as that to be paid by Philippine Rayon since it is only the trust receipt that is covered by the guaranty and not the full ex-tent of the latter's liability. All things considered, he can be held liable for the sum of P10,000.00 as attorney's fees in favor of the petitioner.

Thus, the trial court committed grave abuse of discretion in dismissing the complaint as against pri-vate respondent Chi and condemning petitioner to pay him P20,000.00 as attorney's fees.

In the light of the foregoing, it would no longer necessary to discuss the other issues raised by the petitioner

WHEREFORE, the instant Petition is hereby GRANTED.

The appealed Decision of 10 March 1986 of the public respondent in AC-G.R. CV No. 66733 and, necessarily, that of Branch 9 (Quezon City) of the then Court of First Instance of Rizal in Civil Case No. Q-19312 are hereby REVERSED and SET ASIDE and another is hereby entered:

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

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

Costs against private respondents.

SO ORDERED.

Gutierrez, Jr., Bidin, Romero and Melo, JJ., concur.

G.R. No. L-43596             October 31, 1936

PHILIPPINE NATIONAL BANK, plaintiff-appellee, vs.THE NATIONAL CITY BANK OF NEW YORK, and MOTOR SERVICE COMPANY, INC., defendants. MOTOR SERVICE COMPANY, INC., appellant.

L. D. Lockwood for appellant.Camus and Delgado for appellee.

 

RECTO, J.:

          This case was submitted for decision to the court below on the following stipulation of facts:

1. That plaintiff is a banking corporation organized and existing under and by virtue of a special act of the Philippine Legislature, with office as principal place of business at the Masonic Temple Bldg., Escolta, Manila, P. I.; that the defendant National City Bank of New York is a foreign banking corporation with a branch office duly authorized and li-censed to carry and engage in banking business in the Philippine Islands, with branch of-fice and place of business in the National City Bank Bldg., City of Manila, P. I., and that the defendant Motor Service Company, Inc., is a corporation organized and existing under and by virtue of the general corporation law of the Philippine Islands, with office and

principal place of business at 408 Rizal Avenue, City of Manila, P. I., engaged in the pur-chase and sale of automobile spare parts and accessories.

2. That on April 7 and 9, 1933, an unknown person or persons negotiated with defendant Motor Service Company, Inc., the checks marked as Exhibits A and A-1, respectively, which are made parts of the stipulation, in payment for automobile tires purchased from said defendant's stores, purporting to have been issued by the "Pangasinan Transportation Co., Inc. by J. L. Klar, Manager and Treasurer", against the Philippine National Bank and in favor of the International Auto Repair Shop, for P144.50 and P215.75; and said checks were indorsed by said unknown persons in the manner indicated at the back thereof, the Motor Service Co., Inc., believing at the time that the signature of J. L. Klar, Manager and Treasurer of the Pangasinan Transportation Co., Inc., on both checks were genuine.

3. The checks Exhibits A and A-1 were then indorsed for deposit by the defendant Motor Service Company, Inc, at the National City Bank of New York and the former was ac-cordingly credited with the amounts thereof, or P144.50 and P215.75.

4. On April 8 and 10, 1933, the said checks were cleared at the clearing house and the Philippine National Bank credited the National City Bank of New York for the amounts thereof, believing at the time that the signatures of the drawer were genuine, that the payee is an existing entity and the endorsement at the back thereof regular and genuine.

5. The Philippine National Bank then found out that the purported signatures of J. L. Klar, as Manager and Treasurer of the Pangasinan Transportation Company, Inc., in said Ex-hibits A and A-1 were forged when so informed by the said Company, and it accordingly demanded from the defendants the reimbursement of the amounts for which it credited the National City Bank of New York at the clearing house and for which the latter cred-ited the Motor Service Co., but the defendants refused, and continue to refuse, to make such reimbursements.

6. The Pangasinan Transportation Co., Inc., objected to have the proceeds of said check deducted from their deposit.

7. Exhibits B, C, D, E, F, and G, which were introduced at the trial in the municipal court of Manila and forming part of the record of the present case, are admitted by the parties as genuine and are made part of this stipulation as well as Exhibit H hereto attached and made a part hereof.

          Upon plaintiff's motion, the case was dismissed before trial as to the defendant National City Bank of New York. a decision was thereafter rendered giving plaintiff judgment for the total amount of P360.25, with interest and costs. From this decision the instant appeal was taken.

          Before us is the preliminary question of whether the original appeal taken by the plaintiff from the decision of the municipal court of Manila where this case originated, became perfected be-cause of plaintiff's failure to attach to the record within 15 days from receipt of notice of said deci -sion, the certificate of appeal bond required by section 76 of the Code of Civil Procedure. It is not disputed that both the appeal docket fee and the appeal cash bond were paid and deposited within the prescribed time. The issue is whether the mere failure to file the official receipt showing that such deposit was made within the said period is a sufficient ground to dismiss plaintiff's appeal. This question was settled by our decision in the case of Blanco vs. Bernabe and lawyers Coopera-tive Publishing Co. (page 124, ante), and no further consideration. No error was committed in al-lowing said appeal.

          We now pass on to consider and determine the main question presented by this appeal, namely, whether the appellee has the right to recover from the appellant, under the circumstances of

this case, the value of the checks on which the signatures of the drawer were forged. The appellant maintains that the question should be answered in the negative and in support of its contention ap-pellant advanced various reasons presently to be examined carefully.

          I. It is contended, first of all, that the payment of the checks in question made by the drawee bank constitutes an "acceptance", and, consequently, the case should be governed by the provisions of section 62 of the Negotiable Instruments Law, which says:

          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 capac-ity and authority to draw the instrument; and

(b) The existence of the payee and his then capacity to indorse.

          This contention is without merit. A check is a bill of exchange payable on demand and only the rules governing bills of exchange payable on demand are applicable to it, according to section 185 of the Negotiable Instruments Law. In view of the fact that acceptance is a step unnecessary, in so far as bills of exchange payable on demand are concerned (sec. 143), it follows that the provi-sions relative to "acceptance" are without application to checks. Acceptance implies, in effect, sub-sequent negotiation of the instrument, which is not true in case of the payment of a check because from the moment a check is paid it is withdrawn from circulation. The warranty established by sec-tion 62, is in favor of holders of the instrument after its acceptance. When the drawee bank cashes or pays a check, the cycle of negotiation is terminated, and it is illogical thereafter to speak of sub -sequent holders who can invoke the warranty provided in section 62 against the drawee. Moreover, according to section 191, "acceptance" means "an acceptance completed by delivery or notifica-tion" and this concept is entirely incompatible with payment, because when payment is made the check is retained by the bank, and there is no such thing as delivery or notification to the party re -ceiving the payment. Checks are not to be accepted, but presented at once for payment. (1 Bouvier's Law Dictionary, 476.) There can be no such thing as "acceptance" in the ordinary sense of the term. A check being payable immediately and on demand, the bank can fulfill its duty to the depositor only by paying the amount demanded. The holder has no right to demand from the bank anything but payment of the check, and the bank has no right, as against the drawer, to do anything but pay it. (5 R. C. L., p. 516, par. 38.) A check is not an instrument which in the ordinary course of busi -ness calls for acceptance. The holder can never claim acceptance as his legal right. He can present for payment, and only for payment. (1 Morse on Banks and Banking, 6th ed., pp. 898, 899.)

          There is, however, nothing in the law or in, business practice against the presentation of checks for acceptance, before they are paid, in which case we have a "certification" equivalent to "acceptance" according to section 187, which provides that "where a check is certified by the bank on which it is drawn, the certification is equivalent to an acceptance", and it is then that the war-ranty under section 62 exists. This certification or acceptance consists in the signification by the drawee of his assent to the order of the drawer, which must not express that the drawee will per -form his promise by any other means than the payment of money. (Sec. 132.) When the holder of a check procures it to be accepted or certified, the drawer and all indorsers are discharged from liabil -ity thereon (sec. 188), and then the check operates as an assignment of a part of the funds to the credit of the drawer with the bank. (Sec. 189.) There is nothing in the nature of the check which in-trinsically precludes its acceptance, in like manner and with like effect as a bill of exchange or draft may be accepted. The bank may accept if it chooses; and it is frequently induced by convenience, by the exigencies of business, or by the desire to oblige customers, voluntarily to incur the obliga-tion. The act by which the bank places itself under obligation to pay to the holder the sum called for by a check must be the expressed promise or undertaking of the bank signifying its intent to assume the obligation, or some act from which the law will imperatively imply such valid promise or un-

dertaking. The most ordinary form which such an act assumes is the acceptance by the bank of the check, or, as it is perhaps more often called, the certifying of the check. (1 Morse on Banks and Banking, pp. 898, 899; 5 R. C. L., p. 520.)

          No doubt a bank may by an unequivocal promise in writing make itself liable in any event to pay the check upon demand, but this is not an "acceptance" of the check in the true sense of that term. Although a check does not call for acceptance, and the holder can present it only for payment, the certification of checks is a means in constant and extensive use in the business of banking, and its effects and consequences are regulated by the law merchant. Checks drawn upon banks or bankers, thus marked and certified, enter largely into the commercial and financial transactions of the country; they pass from hand to hand, in the payment of debts, the purchase of property, and in the transfer of balances from one house and one bank to another. In the great commercial centers, they make up no inconsiderable portion of the circulation, and thus perform a useful, valuable, and an almost indispensable office. The purpose of procuring a check to be certified is to impart strength and credit to the paper by obtaining an acknowledgment from the certifying bank that the drawer has funds therein sufficient to cover the check and securing the engagement of the bank that the check will be paid upon presentation. A certified check has a distinctive character as a species of commercial paper, and performs important functions in banking and commercial business. When a check is certified, it ceases to possess the character, or to perform the functions, of a check, and represents so much money on deposit, payable to the holder on demand. The check becomes a basis of credit — an easy mode of passing money from hand to hand, and answers the purposes of money. (5 R. C. L., pp. 516, 517.)lâwphi1.nêt

          All the authorities, both English and American, hold that a check may be accepted, though acceptance is not usual. By the law merchant, the certificate of the bank that a check is good is equivalent to acceptance. It implies that the check is drawn upon sufficient funds in the hands of the drawee, that they have been set apart for its satisfaction, and that they shall be so applied whenever the check is presented for payment. It is an undertaking that the check is good then, and shall con-tinue good, and this agreement is as binding on the bank as its notes of circulation, a certificate of deposit payable to the order of the depositor, or any other obligation it can assume. The object of certifying a check, as regards both parties is to enable the holder to use it as money. The transferee takes it with the same readiness and sense of security that he would take the notes of the bank. It is available also to him for all the purposes of money. Thus it continues to perform its important func-tions until in the course of business it goes back to the bank for redemption, and is extinguished by payment. It cannot be doubted that the certifying bank intended these consequences, and it is liable accordingly. To hold otherwise would render these important securities only a snare and a delusion. A bank incurs no greater risk in certifying a check than in giving a certificate of deposit. In well-regulated banks the practice is at once to charge the check to the account of the drawer, to credit it in a certified check account, and, when the check is paid, to debit that account with the amount. Nothing can be simpler or safer than this process. (Merchants' Bank vs. States Bank, 10 Wall., 604, at p. 647; 19 Law. ed., 1008, 1019.)

          Ordinarily the acceptance or certification of a check is performed and evidenced by some word or mark, usually the words "good", "certified" or "accepted" written upon the check by the banker or bank officer. (1 Morse, Banks and Banking, 915; 1 Bouvier's Law Dictionary, 476.) The bank virtually says, that check is good; we have the money of the drawer here ready to pay it. We will pay it now if you will receive it. The holder says, No, I will not take the money; you may cer -tify the check and retain the money for me until this check is presented. The law will not permit a check, when due, to be thus presented, and the money to be left with the bank for the accommoda-tion of the holder without discharging the drawer. The money being due and the check presented, it is his own fault if the holder declines to receive the pay, and for his own convenience has the money appropriated to that check subject to its future presentment at any time within the statute of limitations. (1 Morse on Banks and Banking, p. 920.)

          The theory of the appellant and of the decisions on which it relies to support its view is viti-ated by the fact that they take the word "acceptance" in its ordinary meaning and not in the techni-cal sense in which it is used in the Negotiable Instruments Law. Appellant says that when payment is made, such payment amounts to an acceptance, because he who pays accepts. This is true in common parlance but "acceptance" in legal contemplation. The word "acceptance" has a peculiar meaning in the Negotiable Instruments Law, and, as has been above stated, in the instant case there was payment but no acceptatance, or what is equivalent to acceptance, certification.

          With few exceptions, the weight of authority is to the effect that "payment" neither includes nor implies "acceptance".

          In National Bank vs. First National Bank ([19101, 141 Mo. App., 719; 125 S. W., 513), the court asks, if a mere promise to pay a check is binding on a bank, why should not the absolute pay-ment of the check have the same effect? In response, it is submitted that the two things, — that is acceptance and payment, — are entirely different. If the drawee accepts the paper after seeing it, and then permits it to go into circulation as genuine, on all the principles of estoppel, he ought to be prevented from setting up forgery to defeat liability to one who has taken the paper on the faith of the acceptance, or certification. On the other hand, mere payment of the paper at the termination of its course does not act as an estoppel. The attempt to state a general rule covering both acceptance and payment is responsible for a large part of the conflicting arguments which have been advanced by the courts with respect to the rule. (Annotation at 12 A. L. R., 1090 1921].)

          In First National Bank vs. Brule National Bank ([1917], 12 A. L. R., 1079, 1085), the court said:

          We are of the opinion that "payment is not acceptance". Acceptance, as defined by section 131, cannot be confounded with payment. . . .

          Acceptance, certification, or payment of a check, by the express language of the statute, discharges the liability only of the persons named in the statute, to wit, the drawer and all indorsers, and the contract of indorsement by the negotiator if the check is dis-charged by acceptance, certification, or payment. But clearly the statute does not say that the contract of warranty of the negotiator, created by section 65, is discharged by these acts.

          The rule supported by the majority of the cases (14 A. L. R. 764), that payment of a check on a forged or unauthorized indorsement of the payee's name, and charging the same to the drawer's account, do not amount to an acceptance so as to make the bank liable to the payee, is supported by all of the recent cases in which the question is considered. (Cases cited, Annotation at 69 A. L. R., 1076, 1077 [1930].)

          Merely stamping a check "Paid" upon its payment on a forged or unauthorized indorsement is not an acceptance thereof so as to render the drawee bank liable to the true payee. (Ander-son vs. Tacoma National Bank [1928], 146 Wash., 520; 264 Pac., 8; Annotation at 69 A. L. R., 1077, [1930].)

          In State Bank of Chicago vs. Mid-City Trust & Savings Bank (12 A. L. R., 989, 991, 992), the court said:

          The defendant in error contends that the payment of the check shows acceptance by the bank, urging that there can be no more definite act by the bank upon which a check has been drawn, showing acceptance than the payment of the check. Section 184 of the Negotiable Instruments Act (sec. 202) provides that the provisions of the act applicable to bills of exchange apply to a check, and section 131 (sec. 149), that the acceptance of a bill must be in writing signed by the drawee. Payment is the final act which extinguishes a bill. Acceptance is a promise to pay in the future and

continues the life of the bill. It was held in the First National Bank vs. Whitman (94 U. S., 343; 24 L. ed., 229), that payment of a check upon a forged indorsement did not operate as an acceptance in favor of the true owner. The contrary was held in Pickle vs. Muse (Fickle vs. People's Nat. Bank, 88 Tenn., 380; 7 L.R.A., 93; 17 Am. St. Rep., 900; 12 S. W., 919), and Seventh National Bank vs. Cook (73 Pa., 483; 13 Am. Rep., 751) at a time when the Negotiable Instruments Act was not in force in those states. The opinion of the Supreme Court of the United States seems more logi-cal, and the provision of the Negotiable Instruments Act now require an acceptance to be in writing. Under this statute the payment of a check on a forged indorsement, stamping it "paid," and charging it to the account of the drawer, do not constitute an acceptance of the check or create a liability of the bank to the true holder or the payee. (Elyria Sav. & Bkg. Co. vs. Walker Bin Co., 92 Ohio St., 406; L. R. A., 1916D, 433; 111 N. E., 147; Ann. Cas. 1917D, 1055; Baltimore & O. R. Co. vs. First National Bank, 102 Va., 753; 47 S. E., 837; State Bank of Chicago vs. Mid-City Trust & Savings Bank 12 A. L. R., pp. 989, 991, 992.)

          Before drawee's acceptance of check there is no privity of contract between drawee and payee. Drawee's payment of check on unauthorized indorsement does not constitute "acceptance" of check. (Sinclair Refining Co.vs. Moultrie Banking Co., 165 S. E., 860 [1932].)

          The great weight of authority is to the effect that the payment of a check upon a forged or unauthorized indorsement and the stamping of it "paid" does not constitute an acceptance. (Dakota Radio Apparatus Co. vs.First Nat. Bank of Rapid City, 244 N. W., 351, 352 [1932].)

          Payment of the check, cashing it on presentment is not acceptance. (South Boston Trust Co. vs. Levin, 249 Mass., 45, 48, 49; 143 N. E., 816; Blocker, Shepard Co. vs. Granite Trust Com-pany, 187 Me., 53, 54 [1933].)

          In Rauch vs. Bankers National Bank of Chicago (143 Ill. App., 625, 636, 637 [1908]), the language of the decision was as follows:

          . . . The plaintiffs say that this acceptance was made by the very unauthorized pay-ments of which they complain. This suggestion does not seem forceful to us. It is the con-tention which was made before the Supreme Court of the United States in First National Bank vs. Whitman (94 U. S., 343), and repudiated by that court. The language of the opinion in that case is so apt in the present case that we quote it:

          "It is further contended that such an acceptance of a check as creates a privity be-tween the payee and the bank is established by the payment of the amount of this check in the manner described. This argument is based upon the erroneous assumption that the bank has paid this check. If this were true, it would have discharged all of its duty, and there would be an end to the claim against it. The bank supposed that it had paid the check, but this was an error. The money it paid was upon a pretended and not a real in -dorsement of the name of the payee. . . . We cannot recognize the argument that payment of the amount of the check or sight draft under such circumstances amounts to an accep-tance creating a privity of contract with the real owner.

          "It is difficult to construe a payment as an acceptance under any circumstances. . . . A banker or individual may be ready to make actual payment of a check or draft when presented, while unwilling to make a promise to pay at a future time. Many, on the other hand, are more ready to promise to pay than to meet the promise when required. The dif-ference between the transactions is essential and inherent."

          And in Wharf vs. Seattle National Bank (24 Pac. [2d]), 120, 123 [1933]):

          It is the rule that payment of a check on unauthorized or forged indorsement does not operate as an acceptance of the check so as to authorize an action by the real owner to

recover its amount from the drawee bank. (Michie on Banks and Banking, vol. 5, sec. 278, p. 521.) A full list of the authorities supporting the rule will be found in a footnote to the foregoing citation. (See also, Federal Land Bank vs. Collins, 156 Miss., 893; 127 So., 570; 69 A. L. R., 1068.)

          In a very recent case, Federal Land Bank vs. Collins (69 A. L. R., 1068, 1072-1074), this question was discussed at considerable length. The court said:

          In the light of the first of these statutes, counsel for appellant is forced to stand upon the nar -row ledge that the payment of the check by the two banks will constitute an acceptance. The drawee bank simply marked it "paid" and did not write anything else except the date. The bank first paying the check, the Commercial National Bank and Trust Company, simply wrote its name as in-dorser and passed the check on to the drawee bank; does this constitute an acceptance? The precise question has not been presented to this court for decision. Without reference to authorities in other jurisdictions it would appear that the drawee bank had never written its name across the paper and therefore, under the strict terms of the statute, could not be bound as an acceptor; in the second place, it does not appear to us to be illogical and unsound to say that the payment of a check by the drawee, and the stamping of it "paid", is equivalent to the same thing as the acceptance of a check; however, there is a variety of opinions in the various jurisdictions on this question. Counsel cor-rectly states that the theory upon which the numerous courts hold that the payment of a check cre -ates privity between the holder of the check and the drawee bank is tantamount to a pro tanto as-signment of that part of the funds. It is most easily understood how the payment of the check, when not authorized to be done by the drawee bank, might under such circumstances create liability on the part of the drawee to the drawer. Counsel cites the case of Pickle vs. Muse (88 Tenn, 380; 12 S. W., 919; 7 L. R. A., 93; 17 Am. St. Rep., 900), wherein Judge Lurton held that the acceptance of a check was necessary in order to give the holder thereof a right of action thereon against the bank, and further held in a case similar to this, so far as this question is concerned, that the acceptance of a check so as to give a right of action to the payee is inferred from the retention of the check by the bank and its subsequent charge of the amount to the drawer, although it was presented by, and pay -ment made, an unauthorized person. Judge Lurton cited the case of National Bank of the Repub-lic vs. Millard (10 Wall., 152; 19 L. ed., 897), wherein the Supreme Court of the United States, not having such a case before it, threw out the suggestion that, if it was shown that a bank had charged the check on its books against the drawer and made settlement with the drawee that the holder could recover on account of money had and received, invoking the rule of justice and fairness, it might be said there was an implied promise to the holder to pay it on demand. (SeeNational Bank of the Republic vs. Millard, 10 Wall. [77 U. S.], 152; 19 L. ed., 899.) The Tennessee court then ar-gued that it would be inequitable and unconscionable for the owner and payee of the check to be limited to an action against an insolvent drawer and might thereby lose the debt. They recognized the legal principle that there is no privity between the drawer bank and the holder, or payee, of the check, and proceeded to hold that no particular kind of writing was necessary to constitute an ac -ceptance and that it became a question of fact, and the bank became liable when it stamped it "paid" and charged it to the account of the drawer, and cites, in support of its opinion, Seventh National Bank vs. Cook (73 Pa., 483; 13 Am. Rep., 751); Saylor vs. Bushong (100 Pa., 23; 45 Am. Rep., 353); and Dodge vs. Bank (20 Ohio St., 234; 5 Am. Rep., 648).

          This decision was in 1890, prior to the enactment of the Negotiable Instruments Law by the State of Tennessee. However, in this case Judge Snodgrass points out that the Millard case, supra, was dicta. The Dodge case, from the Ohio court, held exactly as the Tennessee court, but subsequently in the case of Elyria Bank vs. Walker Bin Co. (92 Ohio St., 406; 111 N. E., 147; L. R. A. 1916D, 433; Ann. Cas. 1917D, 1055), the court held to the contrary, called attention to the fact that the Dodge case was no longer the law, and proceeded to announce that, whatever might have been the law before the passage of the Negotiable Instrument Act in that state, it was no longer the law; that the rule announced

in the Dodge case had been "discarded." The court, in the latter case, expressed its doubts that the courts of Tennessee and Pennsylvania would adhere to the rule announced in the Pickle case, quoted supra, in the face of the Negotiable Instrument Law. Subsequent to the Millard case, the Supreme Court of the United States, in the case of First National Bank of Washington vs. Whitman (94 U. S., 343, 347; 24 L. ed., 229), where the bank, without any knowledge that the indorsement of the payee was unauthorized, paid the check, and it was contended that by the payment the privity of contract existing between the drawer and drawee was imparted to the payee, said:

          "It is further contended that such an acceptance of the check as creates a privity be-tween the payee and the bank is established by the payment of the amount of this check in the manner described. This argument is based upon the erroneous assumption that the bank has paid this check. If this were true, it would have discharged all of its duty, and there would be an end of the claim against it. The bank supposed that it had paid the check; but this was an error. The money it paid was upon a pretended and not a real in -dorsement of the name of the payee. The real indorsement of the payee was as necessary to a valid payment as the real signature of the drawer; and in law the check remains un -paid. Its pretended payment did not diminish the funds of the drawer in the bank, or put money in the pocket of the person entitled to the payment. The state of the account was the same after the pretended payment as it was before.

          "We cannot recognize the argument that a payment of the amount of a check or sight draft under such circumstances amounts to an acceptance, creating a privity of con-tract with the real owner. It is difficult to construe a payment as an acceptance under any circumstances. The two things are essentially different. One is a promise to perform an act, the other an actual performance. A banker or an individual may be ready to make ac-tual payment of a check or draft when presented, while unwilling to make a promise to pay at a future time. Many, on the other hand, are more ready to promise to pay than to meet the promise when required. The difference between the transactions is essential and inherent."

          Counsel for the appellant cite other cases holding that the stamping of the check "paid" and the charging of the amount thereof to the drawer constituted an acceptance, but we are of opinion that none of these cases cited hold that it is in compliance with the Negotiable Instruments Act; paying the check and stamping same is not the equivalent of accepting the check in writing signed by the drawee. The cases holding that payment as indicated above constituted acceptance were rendered prior to the adoption of the Nego-tiable Instruments Act in the particular state, and these decisions are divided into two classes: the one holding that the check delivered by the drawer to the holder and pre-sented to the bank or drawee constitutes an assignment pro tanto; the other holding that the payment of the check and the charging of same to the drawee although paid to an unauthorized person creates privity of contract between the holder and the drawee bank.

          We have already seen that our own court has repudiated the assignment pro tanto theory, and since the adoption of the Negotiable Instrument Act by this state we are compelled to say that payment of a check is not equivalent to accepting a check in writing and signing the name of the acceptor thereon. Payment of the check and the charging of same to the drawer does not constitute an acceptance. Payment of the check is the end of the voyage; acceptance of the check is to fuel the vessel and strengthen it for continued operation on the commercial sea. What we have said applies to the holder and not to the drawer of the check. On this question we conclude that the general rule is that an action cannot be maintained by a payee of the check against the bank on which is draw unless the check has been certified or accepted by the bank in compliance with the statute, even

though at the time the check is that an action cannot be maintained by a payee of the drawer of the check out of which the check is legally payable; and that the payment of the check by the bank on which it is drawn, even though paid on the unauthorized indorse-ment of the name of the holder (without notice of the defect by the bank), does not consti-tute a certification thereof, neither is it an acceptance thereof; and without acceptance or certification, as provided by statute, there is no privity of contract between the drawee bank and the payee, or holder of the check. Neither is there an assignmentpro tanto of the funds where the check is not drawn on a particular fund, or does not show on its face that it is an assignment of a particular fund. The above rule as stated seems to have been the rule in the majority of the states even before the passage of the uniform Negotiable Instru-ments Act in the several states.

          The decision in the case of First National Bank vs. Bank of Cottage Grove (59 Or., 388), which appellant cites in its brief (pp. 12, 13 ) has been expressly overruled by the Supreme Court of Massachusetts in South Boston Trust Co. vs. Levin (143 N. E., 816, 817), in the following lan-guage:

          In First National Bank vs. Bank of Cottage Grove (59 Or., 388; 117 Pac., 293, 296, at page 396), it was said: "The payment of a bill or check by the drawee amounts to more than an acceptance. The rule, holding that such a payment has all the efficacy of an accep-tance, is founded upon the principle that the greater includes the less." We are unable to agree with this statement as there is no similarity between acceptance and payment; pay-ment discharges the instrument, and no one else is expected to advance anything on the faith of it; acceptance, contemplates further circulation, induced by the fact of acceptance. The rule that the acceptor made certain admissions which will inure to the benefit of sub -sequent holders, has no applicability to payment of the instrument where subsequent holders can never exist.

          II. The old doctrine that a bank was bound to know its correspondent's signature and that a drawee could not recover money paid upon a forgery of the drawer's name, because it was said, the drawee was negligent not to know the forgery and it must bear the consequence of its negligence, is fast fading into the misty past, where it belongs. It was founded in misconception of the fundamen -tal principles of law and common sense. (2 Morse, Banks and Banking, p. 1031.)

          Some of the cases carried the rule to its furthest limit and held that under no circumstances (except, of course, where the purchaser of the bill has participated in the fraud upon the drawee) would the drawee be allowed to recover bank money paid under a mistake of fact upon a bill of ex-change to which the name of the drawer had been forged. This doctrine has been freely criticized by the eminent authorities, as a rule too favorable to the holder, not the most fair, nor best calculated to effectuate justice between the drawee and the drawer. (5 R.C.L., p. 556.)

          The old rule which was originally announced by Lord Mansfield in the leading case of Price vs. Neal (3 Burr., 1354), elicited the following comment from Justice Holmes, then Chief Jus-tice of the Supreme Court of Massachusetts, in the case of Dedham National Bank vs. Everett Na-tional Bank (177 Mass., 392). "Probably the rule was adopted from an impression of convenience rather than for any more academic reason; or perhaps we may say that Lord Mansfield took the case out of the doctrine as to payments under a mistake of fact by the assumption that a holder who simply presents negotiable paper for payment makes no representation as to the signature, and that the drawee pays at his peril."

          Such was the reaction that followed Lord Mansfield's rule which Justice Story of the United States Supreme adopted in the case of Bank of United States vs. Georgia (10 Wheat., 333), that in B. B. Ford & Co. vs. People's Bank of Orangeburg (74 S. C., 180), it was held that "an unrestricted indorsement of a draft and presentation to the drawee is a representation that the signature of the

drawer is genuine", and in Lisbon First National Bank vs.Wyndmere Bank (15 N. D., 299), it was also held that "the drawee of a forged check who has paid the same without detecting the forgery, may upon discovery of the forgery, recover the money paid from the party who received the money, even though the latter was a good faith holder, provided the latter has not been misled or prejudiced by the drawee's failure to detect the forgery."

          Daniel, in his treatise on Negotiable Instruments, has the following to say:

          In all the cases which hold the drawee absolutely estoppel by acceptance or payment from denying genuineness of the drawer's name, the loss is thrown upon him on the ground of negligence on his part in accepting or paying, until he has ascertained the bill to be genuine. But the holder has preceded him in negligence, by himself not ascertaining the true character of the paper before he re-ceived it, or presented it for acceptance or payment. And although, as a general rule, the drawee is more likely to know the drawer's handwriting than a stranger is, if he is in fact deceived as to its genuineness, we do not perceive that he should suffer more deeply by mistake than a stranger, who, without knowing the handwriting, has taken the paper without previously ascertaining its genuine-ness. And the mistake of the drawee should always be allowed to be corrected, unless the holder, acting upon faith and confidence induced by his honoring the draft, would be placed in a worse po-sition by according such privilege to him. This view has been applied in a well considered case, and is intimidated in another; and is forcibly presented by Mr. Chitty, who says it is going a great way to charge the acceptor with knowledge of his correspondent's handwriting, "unless some bona fide holder has purchased the paper on the faith of such an act." Negligence in making payment un-der a mistake of fact is not now deemed a bar to recovery of it, and we do not see why any excep -tion should be made to the principle, which would apply as well as to release an obligation not con-summated by payment. ( Vol. 2, 6th edition, pp. 1537-1539.)

          III. But now the rule is perfectly well settled that in determining the relative rights of a drawee who, under a mistake of fact, has paid, and a holder who has received such payment, upon a check to which the name of the drawer has been forged, it is only fair to consider the question of diligence or negligence of the parties in respect thereto. (Woods and Malone vs. Colony Bank [1902], 56 L. R. A., 929, 932.) The responsibility of the drawee who pays a forged check, for the genuineness of the drawer's signature, is absolute only in favor of one who has not, by his own fault or negligence, contributed to the success of the fraud or to mislead the drawee. (National Bank of America vs. Bangs, 106 Mass., 441; 8 Am. Rep., 349; Woods and Malone vs. Colony Bank, supra; De Feriet vs.Bank of America, 23 La. Ann., 310; B. B. Ford & Co. vs. People's Bank of Orange-burg, 74 S. C., 180; 10 L. R. A. [N. S.], 63.) If it appears that the one to whom payment was made was not an innocent sufferer, but was guilty of negligence in not doing something, which plain duty demanded, and which, if it had been done, would have avoided entailing loss on any one, he is not entitled to retain the moneys paid through a mistake on the part of the drawee bank. (First Nat. Bank of Danvers vs. First Nat. Bank of Salem, 151 Mass., 280; 24 N. E., 44; 21 A. S. R., 450; First Nat. Bank of Orleans vs. State Bank of Alma, 22 Neb., 769; 36 N. W., 289; 3 A. S. R., 294; Ameri-can Exp. Co. vs. State Nat. Bank, 27 Okla., 824; 113 Pac., 711; 33 L. R. A. [N. S.], 188; B. B. Ford & Co. vs. People's Bank of Orangeburg, 74 S. C., 180; 54 S. E., 204; 114 A. S. R., 986; 7 Ann. Cas., 744; 10 L. R. A. [N. S.], 63; People's Bank vs. Franklin Bank, 88 Tenn. 299; 12 S. W., 716; 17 A. S. R.) 884; 6 L. R. A., 724; Canadian Bank of Commerce vs. Bingham, 30 Wash., 484; 71 Pac., 43; 60 L. R. A., 955.) In other words, to entitle the holder of a forged check to retain the money ob-tained he must be able to show that the whole responsibility of determining the validity of the sig -nature was upon the drawee, and that the negligence of such drawee was not lessened by any failure of any precaution which, from his implied assertion in presenting the check as a sufficient voucher, the drawee had the right to believe he had taken. (Ellis vs. Ohio Life Insurance & Trust Co., 4 Ohio St., 628; Rouvantvs. Bank, 63 Tex., 610; Bank vs. Ricker, 71 Ill., 429; First National Bank of Dan-vers vs. First Nat. Bank of Salem, 24 N. E., 44, 45; B. B. Ford & Co. vs. People's Bank of Orange-burg, supra.) The recovery is permitted in such case, because, although the drawee was construc-

tively negligent in failing to detect the forgery, yet if the purchaser had performed his duty, the forgery would in all probability have been detected and the fraud defeated. (First National Bank of Lisbon vs. Bank of Wyndmere, 15 N. D., 209; 10 L. R. A. [N. S.], 49.) In the absence of actual fault on the part of the drawee, his constructive fault in not knowing the signature of the drawer and de-tecting the forgery will not preclude his recovery from one who took the check under circumstances of suspicion without proper precaution, or whose conduct has been such as to mislead the drawee or induce him to pay the check without the usual scrutiny or other precautions against mistake or fraud. (National Bank of America vs. Bangs, supra; First National Bank vs. Indiana National Bank, 30 N. E., 808-810; Woods and Malone vs. Colony Bank, supra; First National Bank of Dan-vers vs. First Nat. Bank of Salem, 151 Mass., 280.) Where a loss, which must be borne by one of two parties alike innocent of forgery, can be traced to the neglect or fault of either, it is unreason-able that it would be borne by him, even if innocent of any intentional fraud, through whose means it has succeeded. (Gloucester Bank vs. Salem Bank, 17 Mass., 33; First Nat. Bank of Dan-vers vs. First National Bank of Salem,supra; B. B. Ford & Co. vs. People's Bank of Orange-burg, supra.) Again if the indorser is guilty of negligence in receiving and paying the check or draft, or has reason to believe that the instrument is not genuine, but fails to inform the drawee of his suspicions the indorser according to the reasoning of some courts will be held liable to the drawee upon his implied warranty that the instrument is genuine. (B. B. Ford & Co. vs. People's Bank of Orangeburg, supra; Newberry Sav. Bank vs. Bank of Columbia, 93 S. C., 294; 38 L. R. A. [N. S], 1200.) Most of the courts now agree that one who purchases a check or draft is bound to sat-isfy himself that the paper is genuine; and that by indorsing it or presenting it for payment or putting it into circulation before presentation he impliedly asserts that he has performed his duty, the drawee, who has, without actual negligence on his part, paid the forged demand, may recover the money paid from such negligent purchaser. (Lisbon First National Bank vs.Wyndmere Bank, supra.) Of course, the drawee must, in order to recover back the holder, show that he himself was free from fault. (See also 5 R. C. L., pp. 556-558.)

          So, if a collecting bank is alone culpable, and, on account of its negligence only, the loss has occurred, the drawee may recover the amount it paid on the forged draft or check. (Security Com-mercial & Sav. Bank vs.Southern Trust & C. Bank [1925], 74 Cal. App., 734; 241 Pac., 945.)

          But we are aware of no case in which the principle that the drawee is bound to know the sig -nature of the drawer of a bill or check which he undertakes to pay has been held to be decisive in favor of a payee of a forged bill or check to which he has himself given credit by his indorsement. (Secalso, Mckleroy vs. Bank, 14 La. Ann., 458; Canal Bank vs. Bank of Albany, 1 Hill, 287; Rou-vant vs. Bank, supra, First Nat. Bank vs. Indiana National Bank; 30 N. E., 808-810.)

          In First Nat. Bank vs. United States National Bank ([1921], 100 Or., 264; 14 A. L. R., 479; 197 Pac., 547), the court declared: "A holder cannot profit by a mistake which his negligent disre-gard of duty has contributed to induce the drawee to commit. . . . The holder must refund, if by his negligence he has contributed to the consummation of the mistake on the part of the drawee by mis-leading him. . . . If the only fault attributable to the drawee is the constructive fault which the law raises from the bald fact that he has failed to detect the forgery, and if he is not chargeable with ac -tual fault in addition to such constructive fault, then he is not precluded from recovery from a holder whose conduct has been such as to mislead the drawee or induce him to pay the check or bill of exchange without the usual security against fraud. The holder must refund to a drawee who is not guilty of actual fault if the holder was negligent in not making due inquiry concerning the valid-ity of the check before he took it, and if the drawee can be said to have been excused from making inquiry before taking the check because of having had a right to, presume that the holder had made such inquiry."

          The rule that one who first negotiates forged paper without taking some precaution to learn whether or not it is genuine should not be allowed to retain the proceeds of the draft or check from

the drawee, whose sole fault was that he did not discover the forgery before he paid the draft or check, has been followed by the later cases. (Security Commercial & Savings Bank vs. Southern Trust & C. Bank [1925], 74 Cal. App., 734; 241 Pac., 945; Hutcheson Hardware Co.  vs. Planters State Bank [1921], 26 Ga. App., 321; 105 S. E., 854; [Annotation at 71 A. L. R., 337].)

          Where a bank, without inquiry or identification of the person presenting a forged check, pur-chases it, indorses it, generally, and presents it to the drawee bank, which pays it, the latter may re-cover if its only negligence was its mistake in having failed to detect the forgery, since its mistake, did not mislead the purchaser or bring about a change in position. (Security Commercial & Savings Bank vs. Southern Trust & C. Bank [1925], 74 Cal. App., 734; 241 Pac., 945.)

          Also, a drawee could recover from another bank the portion of the proceeds of a forged check cashed by the latter and deposited by the forger in the second bank and never withdrawn, upon the discovery of the forgery three months later, after the drawee had paid the check and returned the voucher to the purported drawer, where the purchasing bank was negligent in taking the check, and was not injured by the drawee's negligence in discovering and reporting the forgery as to the amount left on deposit, since it was not a purchaser for value. (First State Bank & T. Co.  vs. First Nat. Bank [1924], 314 Ill., 269; 145 N. E., 382.)

          Similarly, it has been held that the drawee of a check could recover the amount paid on the check, after discovery of the forgery, from another bank, which put the check into circulation by cashing it for the one who had forged the signature of both drawer and payee without making any inquiry as to who he was although he was a stranger, after which the check reached, and was paid by, the drawee, after going through the hands of several intermediate indorsees. (71 A. L. R., p. 340.)

          In First National Bank vs. Brule National Bank ([1917], 12 A. L. R., 1079, 1085), the follow-ing statement was made:

          We are clearly of opinion, therefore that the warranty of genuineness, arising upon the act of the Brule National Bank in putting the check in circulation, was not discharged by payment of the check by the drawee (First National Bank), nor was the Brule National Bank deceived or misled to its prejudice by such payment. The Brule National Bank by its indorsement and delivery warranted its own identification of Kost and the genuineness of his signature. The indorsement of the check by the Brule National Bank was such as to assign the title to the check to its assignee, the Whitbeck National Bank, and the amount was credited to the indorser. The check bore no indication that it was deposited for collection, and was not in any manner restricted so as to constitute the indorsee the agent of the indorser, nor did it prohibit farther negotiation of the instrument, nor did it appear to be in trust for, or to the use of, any other person, nor was it conditional. Certainly the Pukwana Bank was justified in relying upon the warrant of genuineness, which implied the full identification of Kost, and his signature by the defendant bank. This view of the statute is in accord with the deci -sions of many courts. (First National Bank vs. State Bank, 22 Neb., 769; 3 Am. St. Rep., 294; 36 N. W., 289; First National Bank vs. First National Bank, 151 Mass., 280; 21 Am. St. Rep., 450; 24 N. E., 44; People's Bank vs. Franklin Bank, 88 Tenn., 299; 6 L. R. A., 727; 17 Am. St. Rep., 884; 12 S. W., 716.)"

          The appellant leans heavily on the case of Fidelity & Co. vs. Planenscheck (71 A. L. R., 331), decided in 1929. We have carefully examined this decision and we do not feel justified in accepting its conclusions. It is but a restatement of the long abandoned rule of Neal  vs. Price, and it predi-cated on the wrong premise that the payment includes acceptance, and that a bank drawee paying a check drawn on it becomes ipso facto an acceptor within the meaning of section 62 of the Nego-tiable Instruments Act. Moreover in a more recent decision, that of Louisa National Bank vs. Ken-tucky National Bank (39 S. W. [2nd] 497, 501) decided in 1931, the Court of Appeals of Kentucky held the following:

          The appellee, on presentation for payment of $600 check, failed to discover it was a forgery. It was bound to know the signature of its customer, Armstrong, and it was derelict in failing to give his signature to the check sufficient attention and examination to enable it to discover instantly the forgery. The appellant, when the check was presented to it by Banfield, failed to make an inquiry of or about him and did not cause or have him to be identified. Its act in so paying to him the check is a degree of negligence on its part equivalent to positive negligence. It indorsed the check, and, while such indorsement may not be regarded within the meaning of the Negotiable Instrument Law as amounting to a warranty to appellant of that which it indorsed, it at least substantially served as a repre-sentation to it that it had exercised ordinary care and had complied with the rules and cus-toms of prudent banking. Its indorsement was calculated, if it did not in fact do so, to lull the drawee bank into indifference as to the drawer's signature to it when paying the check and charging it to its customer's account and remitting its proceeds to appellant's corre-spondent.

          If in such a transaction between the drawee and the holder of a check both are with-out fault, no recovery may be had of the money so paid. (Deposit Bank of George-town vs. Fayette National Bank, supra, and cases cited.) Or the rule may be more accu-rately stated that, where the drawee pays the money, he cannot recover it back from a holder in good faith, for value and without fault.

          If, on the other hand, the holder acts in bad faith, or is guilty of culpable negli -gence, a recovery may be had by the drawee of such holder. The negligence of the Bank of Louisa in failing to inquire of and about Banfield, and to cause or to have him identi-fied before it parted with its money on the forged check, may be regarded as the primary and proximate cause of the loss. Its negligence in this respect reached in its effect the ap-pellee, and induced incaution on its part. In comparison of the degrees of the negligence of the two, it is apparent that of the appellant excels in culpability. Both appellant and ap-pellee inadvertently made a mistake, doubtless due to a hurry incident to business. The first and most grievous one was made by the appellant , amounting to its disregard of the duty, it owed itself as well as the duty it owed to the appellee, and it cannot on account thereof retain as against the appellee the money which it so received. It cannot shift the loss to the appellee, for such disregard of its duty inevitably contributed to induce the ap-pellee to omit its duty critically to examine the signature of Armstrong, even if it did not know it instantly at the time it paid the check. (Farmers' Bank of Augusta vs. Farmer's Bank of Maysville, supra, and cases cited.)

          IV. The question now is to determine whether the appellant's negligence in purchasing the checks in question is such as to give the appellee the right to recover upon said checks, and on the other hand, whether the drawee bank was not itself negligent, except for its constructive fault in not knowing the signature of the drawer and detecting the forgery.

          We quote with approval the following conclusions of the court a quo:

          Check Exhibit A bears number 637023-D and is dated April 6, 1933, whereas check Exhibit A-1 bears number 637020-D and is dated April 7, 1933. Therefore, the latter check, which is prior in number to the former check, is however, issued on a later date. This circumstance must have aroused at least the curiosity of the Motor Service Co., Inc.

          The Motor Service Co., Inc., accepted the two checks from unknown persons. And not only this; check Exhibit A is indorsed by a subagent of the agent of the payee, Interna-tional Auto Repair Shop. The Motor Service Co., Inc., made no inquiry whatsoever as to the extent of the authority of these unknown persons. Our Supreme Court said once that "any person taking checks made payable to a corporation, which can act only by agents,

does so at his peril, and must abide by the consequences if the agent who indorses the same is without authority" (Insular Drug Co. vs. National Bank, 58, Phil., 684).

x x x           x x x           x x x

          Check Exhibit A-1, aside from having been indorsed by a supposed agent of the in-ternational Auto Repair Shop is crossed generally. The existence of two parallel lines transversally drawn on the face of this check was a warning that the check could only be collected through a banking institution (Jacobs, Law of Bills of Exchange, etc., pp., 179, 180; Bills of Exchange Act of England, secs. 76 and 79). Yet the Motor Service Co., Inc., accepted the check in payment for merchandise.

          . . . In Exhibit H attached to the stipulation of facts as an integral part thereof, the Motor Service Co., Inc., stated the following:

          "The Pangasinan Transportation Co. is a good customer of this firm and we re-ceived checks from them every month in payment of their account. The two checks in question seem to be exactly similar to the checks which we received from the Pangasinan Transportation Co. every month."

          If the failure of the Motor Service Co., Inc., to detect the forgery of the drawer's signature in the two checks, may be considered as an omission in good faith because of the similarity stated in the letter, then the same consideration applies to the Philippine Na-tional Bank, for the drawer is a customer of both the Motor Service Co., Inc., and the Philippine National Bank. (B. of E., pp. 25, 28, 35.)

          We are of opinion that the facts of the present case do not make it one between two equally innocent persons, the drawee bank and the holder, and that they are governed by the authorities al -ready cited and also the following:

          The point in issue has sometimes been said to be that of negligence. The drawee who has paid upon the forged signature is held to bear the loss, because he has been neg -ligent in failing to recognize that the handwriting is not that of his customer. But it fol-lows obviously that if the payee, holder, or presenter of the forged paper has himself been in default, if he has himself been guilty of a negligence prior to that of the banker, or if by any act of his own he has at all contributed to induce the banker's negligence, then he may lose his right to cast the loss upon the banker. The courts have shown a steadily increasing disposition to extend the application of this rule over the new conditions of fact which from time to time arise, until it can now rarely happen that the holder, payee, or presenter can escape the imputation of having been in some degree contributory towards the mis-take. Without any actual change in the abstract doctrines of the law, which are clear, just, and simple enough, the gradual but sure tendency and effect of the decisions have been to put as heavy a burden of responsibility upon the payee as upon the drawee, contrary to the original custom. . . . (2 Morse on Banks and Banking, 5th ed., secs. 464 and 466, pp. 82-85 and 86, 87.)

          In First National Bank vs. Brule National Bank (12 A. L. R., 1079, 1088, 1089), the follow-ing statement appears in the concurring opinion:

          What, then, should be the rule? The drawee asks to recover for money had and re-ceived. If his claim did not rest upon a transaction relating to a negotiable instrument plaintiff could recover as for money paid under mistake, unless defendant could show some equitable reason, such as changed condition since, and relying upon, payment by plaintiff. In the Wyndmere Case, the North Dakota court holds that this rule giving right to recover money paid under mistake should extend to negotiable paper, and it rejects in

its entirety the theory of estoppel and puts a case of this kind on exactly the same basis as the ordinary case of payment under mistake. But the great weight of authority, and that based on the better reasoning, holds that the exigencies of business demand a different rule in relation to negotiable paper. What is that rule? Is it an absolute estoppel against the drawee in favor of a holder, no matter how negligent such holder has been? It surely is not. The correct rule recognizes the fact that, in case of payment without a prior accep-tance or certification, the holder takes the paper upon the of the prior indorsers and the credit of the drawer, and not upon the credit of the drawee, in making payment, has a right to rely upon the assumption that the payee used due diligence, especially where such payee negotiated the bill or check to a holder, thus representing that it had so fully satis -fied itself as to the identity and signature of the maker that it was willing to warrant as re -lates thereto to all subsequent holders. (Uniform Act, secs. 65 and 66.) Such correct rule denies the drawee the right to recover when the holder was without fault or when there has been some change of position calling for equitable relief. When a holder of a bill of exchange uses all due care in the taking of bill or check and the drawee thereafter pays same, the transaction is absolutely closed — modern business could not be done on any other basis. While the correct rule promotes the fluidity of two recognized mediums of exchange, those mediums by which the great bulk of business is carried on, checks and drafts, upon the other hand it encourages and demands prudent business methods upon the part of those receiving such mediums of exchange. (Pennington County Bank vs. First State Bank, 110 Minn., 263; 26 L. R. A. [N. S.], 849; 136 Am. St. Rep., 496; 125 N. W., 119; First National Bank vs. State Bank, 22 Neb., 769; 3 Am. St. Rep., 294; 36 N. W., 289; Bank of Williamson, vs. McDowell County Bank, 66 W. Va., 545; 36 L. R. A. [N. S.], 605; 66 S. E., 761; Germania Bank vs. Boutell, 60 Minn., 189; 27 L. R. A., 635; 51 Am. St. Rep., 519; 62 N. W., 327; American Express Co. vs. State National Bank, 27 Okla., 824; 33 L. R. A. [N. S.], 188; 113 Pac., 711; Farmers' National Bank vs. Farmers' & Traders Bank, L. R. A., 1915A, 77, and note (159 Ky., 141; 166 S. W., 986].)

          That the defendant bank did not use reasonable business prudence is clear. It took this check from a stranger without other identification than that given by another stranger; its cashier witnessed the mark of such stranger thus vouching for the identity and signature of the maker; and it indorsed the check as "Paid," thus further throwing plaintiff off guard. Defendant could not but have known, when negotiating such check and putting it into the channel through which it would finally be presented to plaintiff for payment, that plaintiff, if it paid such check, as defendant was asking it to do, would have to rely solely upon the apparent faith and credit that defendant had placed in the drawer. From the very circumstances of this case plaintiff had to act on the facts as presented to it by defendant, upon such facts only.

          But appellant argues that it so changed its position, after payment by plaintiff, that in "equity and good conscience" plaintiff should not recover — it says it did not pay over any money to the forger until after plaintiff had paid the check. There would be merit in such contention if defendant had indorsed the check for "collection," thus advising plain-tiff that it was relying on plaintiff and not on the drawer. It stands in court where it would have been if it had done as it represented.

          In Woods and Malone vs. Colony Bank (56 L. R. A., 929, 932), the court said:

          . . . If the holder has been negligent in paying the forged paper, or has by his con-duct, however innocent, misled or deceived the drawee to his damage, it would be unjust for him to be allowed to shield himself from the results of his own carelessness by assert -ing that the drawee was bound in law to know his drawer's signature.

          V. Section 23 of the Negotiable Instruments Act provides that "when a signature is forged or made without the authority of the person whose signature it purports to be, 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 author-ity.

          It not appearing that the appellee bank did not warrant to the appellant the genuineness of the checks in question, by its acceptance thereof, nor did it perform any act which would have induced the appellant to believe in the genuineness of said instruments before appellant purchased them for value, it can not be said that the appellee is precluded from setting up the forgery and, therefore, the appellant is not entitled to retain the amount of the forged check paid to it by the appellee.

          VI. It has been held by many courts that a drawee of a check, who is deceived by a forgery of the drawer's signature may recover the payment back, unless his mistake has placed an innocent holder of the paper in a worse position than he would have been in if the discovery of the forgery had been made on presentation. (5 R. C. L., p. 559; 2 Daniel on Negotiable Instruments, 1538.) Forgeries often deceived the eye of the most cautious experts; and when a bank has been deceived, it is a harsh rule which compels it to suffer although no one has suffered by its being deceived. (17 A. L. R. 891; 5 R. C. L., 559.)

          In the instant case should the drawee bank be allowed recovery, the appellant's position would not become worse than if the drawee had refused the payment of these checks upon their presentation. The appellant has lost nothing by anything which the drawee has done. It had in its hands some forged worthless papers. It did not purchase or acquire these papers because of any rep-resentation made to it by the drawee. It purchased them from unknown persons and under suspi-cious circumstances. It had no valid title to them, because the persons from whom it received them did not have such title. The appellant could not have compelled the drawee to pay them, and the drawee could have refused payment had it been able to detect the forgery. By making a refund, the appellant would only returning what it had received without any title or right. And when appellant pays back the money it had received it will be entitled to have restored to it the forged papers it parted with. There is no good reason why the accidental payment made by the appellant should in-ure to the benefit of the appellant. If there were injury to the appellant said injury was caused not by the failure of the appellee to detect the forgery but by the very negligence of the appellant in pur-chasing commercial papers from unknown persons without making inquiry as to their genuineness.

          In the light of the foregoing discussion, we conclude:

1. That where a check is accepted or certified by the bank on which it is drawn, the bank is estopped to deny the genuineness of the drawer's signature and his capacity to issue the instrument;

2. That if a drawee bank pays a forged check which was previously accepted or certified by the said bank it cannot recover from a holder who did not participate in the forgery and did not have actual notice thereof;

3. That the payment of a check does not include or imply its acceptance in the sense that this word is used in section 62 of the Negotiable Instruments Law;

4. That in the case of the payment of a forged check, even without former acceptance, the drawee can not recover from a holder in due course not chargeable with any act of negli -gence or disregard of duty;

5. That to entitle the holder of a forged check to retain the money obtained thereon, there must be a showing that the duty to ascertain the genuineness of the signature rested en-

tirely upon the drawee, and that the constructive negligence of such drawee in failing to detect the forgery was not affected by any disregard of duty on the part of the holder, or by failure of any precaution which, from his implied assertion in presenting the check as a sufficient voucher, the drawee had the right to believe he had taken;

6. That in the absence of actual fault on the part of the drawee, his constructive fault in not knowing the signature of the drawer and detecting the forgery will nor preclude his recovery from one who took the check under circumstances of suspicion and without proper precaution, or whose conduct has been such as to mislead the drawee or induce him to pay the check without the usual scrutiny or other precautions against mistake or fraud;

7. That on who purchases a check or draft is bound to satisfy himself that the paper is genuine, and that by indorsing it or presenting it for payment or putting it into circulation before presentation he impliedly asserts that he performed his duty;

8. That while the foregoing rule, chosen from a welter of decisions on the issue as the cor-rect one, will not hinder the circulation of two recognized mediums of exchange by which the great bulk of business is carried on, namely, drafts and checks, on the other hand, it will encourage and demand prudent business methods on the part of those receiving such mediums of exchange;

9. That it being a matter of record in the present case, that the appellee bank in no more chargeable with the knowledge of the drawer's signature than the appellant is, as the drawer was as much the customer of the appellant as of the appellee, the presumption that a drawee bank is bound to know more than any indorser the signature of its depositor does not hold;

10. That according to the undisputed facts of the case the appellant in purchasing the pa-pers in question from unknown persons without making any inquiry as to the identity and authority of the said persons negotiating and indorsing them, acted negligently and con-tributed to the appellee's constructive negligence in failing to detect the forgery;

11. That under the circumstances of the case, if the appellee bank is allowed to recover, there will be no change of position as to the injury or prejudice of the appellant.

          Wherefore, the assignments of error are overruled, and the judgment appealed from must be, as it is hereby, affirmed, with costs against the appellant. So ordered.

Avanceña, C. J., Villa-Real, Abad Santos, Imperial, Diaz, and Laurel, JJ., concur.

G.R. No. L-37467         December 11, 1933

SAN CARLOS MILLING CO., LTD., plaintiff-appellant, vs.BANK OF THE PHILIPPINE ISLANDS and CHINA BANKING CORPORATION, defen-dants-appellees.

Gibbs and McDonough and Roman Ozaeta for appellant.Araneta, De Joya, Zaragosa and Araneta for appellee Bank of the Philippine Islands.Marcelo Nubla and Guevara, Francisco and Recto for appellee China Banking Corporation.

 

HULL, J.:

Plaintiff corporation, organized under the laws of the Territory of Hawaii, is authorized to engaged in business in the Philippine Islands, and maintains its main office in these Islands in the City of Manila.

The business in the Philippine Islands was in the hands of Alfred D. Cooper, its agent under general power of attorney with authority of substitution. The principal employee in the Manila office was one Joseph L. Wilson, to whom had been given a general power of attorney but without power of substitution. In 1926 Cooper, desiring to go on vacation, gave a general power of attorney to New-land Baldwin and at the same time revoked the power of Wilson relative to the dealings with the Bank of the Philippine Islands, one of the banks in Manila in which plaintiff maintained a deposit.

About a year thereafter Wilson, conspiring together with one Alfredo Dolores, a messenger-clerk in plaintiff's Manila office, sent a cable gram in code to the company in Honolulu requesting a tele-graphic transfer to the China Banking Corporation of Manila of $100,00. The money was trans-ferred by cable, and upon its receipt the China Banking Corporation, likewise a bank in which plaintiff maintained a deposit, sent an exchange contract to plaintiff corporation offering the sum of P201,000, which was then the current rate of exchange. On this contract was forged the name of Newland Baldwin and typed on the body of the contract was a note:lawphil.net

Please send us certified check in our favor when transfer is received.

A manager's check on the China Banking Corporation for P201,000 payable to San Carlos Milling Company or order was receipted for by Dolores. On the same date, September 28, 1927, the manger's check was deposited with the Bank of the Philippine Islands by the following endorse-ment:

For deposit only with Bank of the Philippine Islands, to credit of account of San Carlos Milling Co., Ltd.

By (Sgd.) NEWLAND BALDWINFor Agent

The endorsement to which the name of Newland Baldwin was affixed was spurious.

The Bank of the Philippine Islands thereupon credited the current account of plaintiff in the sum of P201,000 and passed the cashier's check in the ordinary course of business through the clearing house, where it was paid by the China Banking Corporation.

On the same day the cashier of the Bank of the Philippine Islands received a letter, purporting to be signed by Newland Baldwin, directing that P200,000 in bills of various denominations, named in the letter, be packed for shipment and delivery the next day. The next day, Dolores witnessed the counting and packing of the money, and shortly afterwards returned with the check for the sum of P200,000, purporting to be signed by Newland Baldwin as agent.

Plaintiff had frequently withdrawn currency for shipment to its mill from the Bank of the Philippine Islands but never in so large an amount, and according to the record, never under the sole supervi-sion of Dolores as the representative of plaintiff.

Before delivering the money, the bank asked Dolores for P1 to cover the cost of packing the money, and he left the bank and shortly afterwards returned with another check for P1, purporting to be signed by Newland Baldwin. Whereupon the money was turned over to Dolores, who took it to plaintiff's office, where he turned the money over to Wilson and received as his share, P10,000.

Shortly thereafter the crime was discovered, and upon the defendant bank refusing to credit plaintiff with the amount withdrawn by the two forged checks of P200,000 and P1, suit was brought against the Bank of the Philippine Islands, and finally on the suggestion of the defendant bank, an amended

complaint was filed by plaintiff against both the Bank of the Philippine Islands and the China Banking Corporation.

At the trial the China Banking Corporation contended that they had drawn a check to the credit of the plaintiff company, that the check had been endorsed for deposit, and that as the prior endorse -ment had in law been guaranteed by the Bank of the Philippine Islands, when they presented the cashier's check to it for payment, the China Banking Corporation was absolved even if the endorse-ment of Newland Baldwin on the check was a forgery.

The Bank of the Philippine Islands presented many special defenses, but in the main their con-tentions were that they had been guilty of no negligence, that they had dealt with the accredited rep-resentatives of the company in the due course of business, and that the loss was due to the dishon-esty of plaintiff's employees and the negligence of plaintiff's general agent.

In plaintiff's Manila office, besides the general agent, Wilson, and Dolores, most of the time there was employed a woman stenographer and cashier. The agent did not keep in his personal posses -sion either the code-book or the blank checks of either the Bank of the Philippine Islands or the China Banking Corporation. Baldwin was authorized to draw checks on either of the depositaries. Wilson could draw checks in the name of the plaintiff on the China Banking Corporation.

After trial in which much testimony was taken, the trial court held that the deposit of P201,000 in the Bank of the Philippine Islands being the result of a forged endorsement, the relation of deposi-tor and banker did not exist, but the bank was only a gratuitous bailee; that the Bank of the Philip -pine Islands acted in good faith in the ordinary course of its business, was not guilty of negligence, and therefore under article 1902 of the Civil Code which should control the case, plaintiff could not recover; and that as the cause of loss was the criminal actions of Wilson and Dolores, employees of plaintiff, and as Newland Baldwin, the agent, had not exercised adequate supervision over plain-tiff's Manila office, therefore plaintiff was guilty of negligence, which ground would likewise de-feat recovery.

From the decision of the trial court absolving the defendants, plaintiff brings this appeal and makes nine assignments of error which we do not deem it necessary to discuss in detail.

There is a mild assertion on the part of the defendant bank that the disputed signatures of Newland Baldwin were genuine and that he had been in the habit of signing checks in blank and turning the checks so signed over to Wilson.

The proof as to the falsity of the questioned signatures of Baldwin places the matter beyond reason-able doubt, nor is it believed that Baldwin signed checks in blank and turned them over to Wilson.

As to the China Banking Corporation, it will be seen that it drew its check payable to the order of plaintiff and delivered it to plaintiff's agent who was authorized to receive it. A bank that cashes a check must know to whom it pays. In connection with the cashier's check, this duty was therefore upon the Bank of the Philippine Islands, and the China Banking Corporation was not bound to in-spect and verify all endorsements of the check, even if some of them were also those of depositors in that bank. It had a right to rely upon the endorsement of the Bank of the Philippine Islands when it gave the latter bank credit for its own cashier's check. Even if we would treat the China Banking Corporation's cashier's check the same as the check of a depositor and attempt to apply the doc-trines of the Great Eastern Life Insurance Co. vs. Hongkong & Shanghai Banking Corporation and National Bank (43 Phil., 678), and hold the China Banking Corporation indebted to plaintiff, we would at the same time have to hold that the Bank of the Philippine Islands was indebted to the China Banking Corporation in the same amount. As, however, the money was in fact paid to plain-tiff corporation, we must hold that the China Banking Corporation is indebted neither to plaintiff nor to the Bank of the Philippine Islands, and the judgment of the lower court far as it absolves the China Banking Corporation from responsibility is affirmed.

Returning to the relation between plaintiff and the Bank of the Philippine Islands, we will now con-sider the effect of the deposit of P201,000. It must be noted that this was not a presenting of the check for cash payment but for deposit only. It is a matter of general knowledge that most endorse-ments for deposit only, are informal. Most are by means of a rubber stamp. The bank would have been justified in accepting the check for deposit even with only a typed endorsement. It accepted the check and duly credited plaintiff's account with the amount on the face of the check. Plaintiff was not harmed by the transaction as the only result was the removal of that sum of money from a bank from which Wilson could have drawn it out in his own name to a bank where Wilson would not have authority to draw checks and where funds could only be drawn out by the check of Bald-win.

Plaintiff in its letter of December 23, 1928, to the Bank of the Philippine Islands said in part:

". . . we now leave to demand that you pay over to us the entire amount of said manager's check of two hundred one thousand (P201,000) pesos, together with interest thereon at the agreed rate of 3 ½ per cent per annum on daily balances of our credit in account cur -rent with your bank to this date. In the event of your refusal to pay, we shall claim interest at the legal rate of 6 per cent from and after the date of this demand inasmuch as we de-sire to withdraw and make use of the money." Such language might well be treated as a ratification of the deposit.

The contention of the bank that it was a gratuitous bailee is without merit. In the first place, it is ab -solutely contrary to what the bank did. It did not take it up as a separate account but it transferred the credit to plaintiff's current account as a depositor of that bank. Furthermore, banks are not gratu-itous bailees of the funds deposited with them by their customers. Banks are run for gain, and they solicit deposits in order that they can use the money for that very purpose. In this case the action was neither gratuitous nor was it a bailment.

On the other hand, we cannot agree with the theory of plaintiff that the Bank of the Philippine Is -lands was an intermeddling bank. In the many cases cited by plaintiff where the bank that cashed the forged endorsement was held as an intermeddler, in none was the claimant a regular depositor of the bank, nor in any of the cases cited, was the endorsement for deposit only. It is therefore clear that the relation of plaintiff with the Bank of the Philippine Islands in regard to this item of P201,000 was that of depositor and banker, creditor and debtor.

We now come to consider the legal effect of payment by the bank to Dolores of the sum of P201,000, on two checks on which the name of Baldwin was forged as drawer. As above stated, the fact that these signatures were forged is beyond question. It is an elementary principle both of bank-ing and of the Negotiable Instruments Law that —

A bank is bound to know the signatures of its customers; and if it pays a forged check, it must be considered as making the payment out of its own funds, and cannot ordinarily charge the amount so paid to the account of the depositor whose name was forged. (7 C.J., 683.)

There is no act of the plaintiff that led the Bank of the Philippine Islands astray. If it was in fact lulled into a false sense of security, it was by the effrontery of Dolores, the messenger to whom it entrusted this large sum of money.

The bank paid out its money because it relied upon the genuineness of the purported signatures of Baldwin. These, they never questioned at the time its employees should have used care. In fact, even today the bank represents that it has a relief that they are genuine signatures.

The signatures to the check being forged, under section 23 of the Negotiable Instruments Law they are not a charge against plaintiff nor are the checks of any value to the defendant.

It must therefore be held that the proximate cause of loss was due to the negligence of the Bank of the Philippine Islands in honoring and cashing the two forged checks.

The judgment absolving the Bank of the Philippine Islands must therefore be reversed, and a judg-ment entered in favor of plaintiff-appellant and against the Bank of the Philippine Islands, defen -dant-appellee, for the sum of P200,001, with legal interest thereon from December 23,1928, until payment, together with costs in both instances. So ordered.

Malcolm, Villa-Real, Vickers, and Imperial, JJ., concur.

G.R. No. 126000 October 7, 1998

METROPOLITAN WATERWORKS AND SEWERAGE SYSTEM (MWSS), petitioner, vs.COURT OF APPEALS, HON. PERCIVAL LOPEZ, AYALA CORPORATION and AYALA LAND, INC., respondents.

G.R. No. 128520 october 7, 1998

METROPOLITAN WATERWORKS AND SEWERAGE SYSTEM, petitioner, vs.HON. PERCIVAL MANDAP LOPEZ, CAPITOL HILLS GOLF AND COUNTRY CLUB INC., SILHOUETTE TRADING CORPORATION, and PABLO ROMAN JR., respondents.

 

MARTINEZ, J.:

These are consolidated petitions for review emanating from Civil Case No. Q-93-15266 of the Re-gional Trial Court of Quezon City, Branch 78, entitled "Metropolitan Waterworks and Sewerage System (hereafter MWSS) vs. Capitol Hills Golf & Country Club Inc. (hereafter, CHGCCI), STC (hereafter, SILHOUETTE), Ayala Corporation, Ayala Land, Inc. (hereafter AYALA) Pablo Roman, Jr., Josefina A. Roxas, Jesus Hipolito, Alfredo Juinito, National Treasurer of the Philippines and the Register of Deeds of Quezon City."

From the voluminous pleadings and other documents submitted by the parties and their divergent styles in the presentation of the facts, the basic antecedents attendant herein are as follows:

Sometime in 1965, petitioner MWSS (then known as NAWASA) leased around one hundred twenty eight (128) hectares of its land (hereafter, subject property) to respondent CHGCCI (formerly the International Sports Development Corporation) for twenty five (25) years and renewable for an-other fifteen (15) years or until the year 2005, with the stipulation allowing the latter to exercise a right of first refusal should the subject property be made open for sale. The terms and conditions of respondent CHGCCI's purchase thereof shall nonetheless be subject to presidential approval.

Pursuant to Letter of instruction (LOI) No. 440 issued on July 29,1976 by then President Ferdinand E. Marcos directing petitioner MWSS to negotiate the cancellation of the MWSS-CHGCCI lease agreement for the disposition of the subject property, Oscar Ilustre, then General Manager of peti-tioner MWSS, sometime in November of 1980 informed respondent CHGCCI, through its presi-dent herein respondent Pablo Roman, Jr., of its preferential right to buy the subject property which was up for sale. Valuation thereof was to be made by an appraisal company of petitioner MWSS' choice, the Asian Appraisal Co., Inc. which, on January 30, 1981, pegged a fair market value of P40.00 per square meter or a total of P53,800,000.00 for the subject property.

Upon being informed that petitioner MWSS and respondent CHGCCI had already agreed in princi-ple on the purchase of the subject property, President Marcos expressed his approval of the sale as

shown in his marginal note on the letter sent by respondents Jose Roxas and Pablo Roman, Jr. dated December 20, 1982.

The Board of Trustees of petitioner MWSS thereafter passed Resolution 36-83, approving the sale of the subject property in favor of respondent SILHOUETTE, as assignee of respondent CHGCCI, at the appraised value given by Asian Appraisal Co., Inc. Said Board Resolution reads:

NOW, THEREFORE, BE IT RESOLVED, as it is hereby resolved, that in ac-cordance with Section 3, Par. (g) of the MWSS Charter and subject to the ap-proval of the President of the Philippines, the sale of a parcel of land located in Balara, Quezon City, covered by TCT No. 36069 of the Registry of Deeds of Quezon City, containing an area of ONE HUNDRED TWENTY SEVEN (127.313) hectares more or less, which is the remaining portion of the area un-der lease after segregating a BUFFER ZONE already surveyed along the unde-veloped area near the treatment plant and the developed portion of the CHGCCI golf course, to SILHOUETTE TRADING CORPORATION as Assignee of Capitol Hills Golf & Country Club, Inc., at FORTY (P40.00) PESOS per square meter, be and is hereby approved.

BE IT RESOLVED FURTHER, that the General Manager be authorized, as he is hereby authorized to sign for and in behalf of the MWSS the contract papers and other pertinent documents relative thereto.

The MWSS-SILHOUETTE sales agreement eventually pushed through. Per the Agreement dated May 11, 1983 covering said purchase, the total price for the subject property is P50,925,200, P25 Million of which was to be paid upon President Marcos' approval of the contract and the balance to be paid within one (1) year from the transfer of the title to respondent SILHOUETTE as vendee with interest at 12% per annum. The balance was also secured by an irrevocable letter of credit. A Supplemental Agreement was forged between petitioner MWSS and respondent SILHOUETTE on August 11, 1983 to accurately identify the subject property.

Subsequently, respondent SILHOUETTE, under a deed of sale dated July 26, 1984, sold to respon-dent AYALA about sixty-seven (67) hectares of the subject property at P110.00 per square meter. Of the total price of around P74 Million, P25 Million was to be paid by respondent AYALA directly to petitioner MWSS for respondent SILHOUETTE's account and P2 Million directly to respondent SILHOUETTE. P11,600,000 was to be paid upon the issuance of title in favor of respondent AY-ALA, and the remaining balance to be payable within one (1) year with 12% per annum interest.

Respondent AYALA developed the land it purchased into a prime residential area now known as the Ayala Heights Subdivision.

Almost a decade later, petitioner MWSS on March 26, 1993 filed an action against all herein named respondents before the Regional Trial Court of Quezon City seeking for the declaration of nullity of the MWSS-SILHOUETTE sales agreement and all subsequent conveyances involving the subject property, and for the recovery thereof with damages.

Respondent AYALA filed its answer pleading the affirmative defenses of (1) prescription, (2) laches, (3) waiver/estoppel/ratification, (4) no cause of action, (5) non-joinder of indispensable par-ties, and (6) non-jurisdiction of the court for non-specification of amount of damages sought.

On June 10, 1993; the trial court issued an Order dismissing the complaint of petitioner MWSS on grounds of prescription, laches, estoppel and non-joinder of indispensable parties.

Petitioner MWSS's motion for reconsideration of such Order was denied, forcing it to seek relief from the respondent Court where its appeal was docketed as CA-G.R. CV No. 50654. It assigned as errors the following:

I. The court a quo committed manifest serious error and gravely abused its discretion when it ruled that plaintiffs cause of action is for annulment of contract which has al-ready prescribed in the face of the clear and unequivocal recitation of six causes of action in the complaint, none of which is for annulment.

II. The lower court erred and exceeded its jurisdiction when, contrary to the rules of court and jurisprudence, it treated and considered the affirmative defenses of Ayalas — de-fenses not categorized by the rules as grounds for a motion to dismiss — as grounds of a motion to dismiss which jus-tify the dismissal of the complaint.

III. The lower court abused its discretion and exceeded its jurisdiction when it favorably acted on Ayala's motion for preliminary hearing of affirmative defenses (motion to dis-miss) by dismissing the complaint without conducting a hearing or otherwise requiring the Ayalas to present evi-dence on the factual moorings of their motion.

IV. The lower court acted without jurisdiction and commit-ted manifest error when it resolved factual issues and made findings and conclusions of facts all in favor of the Ayalas in the absence of any evidence presented by the parties.

V. The court a quo erred when, contrary to the rules and ju-risprudence, it prematurely ruled that laches and estoppel bar the complaint as against Ayalas or that otherwise the al-leged failure to implead indispensable parties dictates the dismissal of the complaint.

In the meantime, respondents CHGCCI and Roman filed their own motions to hear their affirmative defenses which were identical to those adduced by respondent AYALA. For its part, respondent SILHOUETTE filed a similarly grounded motion to dismiss.

Ruling upon these motions, the trial court issued an order dated December 13, 1993 denying all of them. The motions for reconsideration of the respondents concerned met a similar fate in the May 9, 1994 Order of the trial court. They thus filed special civil actions for certiorari before the re-spondent Court which were docketed as CA-G.R. SP Nos. 34605, 34718 and 35065 and thereafter consolidated with CA-G.R. CV No. 50694 for disposition.

Respondent court, on August 19, 1996, rendered the assailed decision, the dispositive portion of which reads:

WHEREFORE, judgment is rendered:

1.) DENYING the petitions for writ of certiorari for lack of merit; and

2.) AFFIRMING the order of the lower court dismissing the complaint against the appellees Ayalas.

SO ORDERED.

Petitioner MWSS appealed to this Court that portion of the respondent Court's decision affirming the trial court's dismissal of its complaint against respondent AYALA, docketed as G.R. No. 126000. The portion dismissing the petition for certiorari (CA-GR Nos. 34605, 347718 and 35065)

of respondents Roman, CHGCCI and SILHOUETTE, however, became final and executory for their failure to appeal therefrom. Nonetheless, these respondents were able to thereafter file before the trial court another motion to dismiss grounded, again, on prescription which the trial court in an Order of October 1996 granted.

This prompted petitioner MWSS to file another petition for review of said trial court Order before this Court and docketed as G.R. No. 128520. On motion of petitioner MWSS, this Court in a Reso-lution dated December 3, 1997 directed the consolidation of G.R. Nos. 126000 and 128520.

The errors assigned by petitioner MWSS in CA-GR No. 126000 are:

I.

In holding, per the questioned Decision dated 19 August 1996, that plaintiffs cause of action is for annulment of contract which has already prescribed in the face of the clear and unequivocal recitation of six causes of action in the com-plaint, none of which is for annulment, and in effect affirming the dismissal by the respondent judge of the complaint against respondent Ayalas. This conclu-sion of respondent CH is, with due respect, manifestly mistaken and legally ab-surd.

II.

In failing to consider that the complaint recited six alternative causes of action, such that the insufficiency of one cause — assuming there is such insufficiency — does not render insufficient the other causes and the complaint itself. The contrary ruling in this regard by respondent CA is founded entirely on specula-tion and conjecture and is constitutive of grave abuse of discretion.

In G.R. No. 128520, petitioner MWSS avers that:

I.

The court of origin erred in belatedly granting respondent's motions to dismiss which are but a rehash, a disqualification, of their earlier motion for preliminary hearing of affirmative defense / motion to dismiss. These previous motions were denied by the lower court, which denial the respondents raised to the Court of Appeals by way of perfection for certiorari, which petitions in turn were dismissed for lack of merit by the latter court. The correctness and validity of the lower court's previous orders denying movant's motion for preliminary hearing of affirmative defense / motion to dismiss has accordingly been settled already with finality and cannot be disturbed or challenged anew at this instance of defendant's new but similarly anchored motions to dismiss, without commit-ting procedural heresy causative of miscarriage of justice.

II.

The lower court erred in not implementing correctly the decision of the Court of Appeal. After all, respondents' own petitions for certiorari questioning the ear-lier denial of their motion for preliminary hearing of affirmative defense / mo-tion to dismiss were dismissed by the Court of Appeal, in the process of affirm-ing the validity and legality of such denial by the court a quo. The dismissal of the respondents' petitions are embodied in the dispositive portion of the said de-cision of the Court of Appeals dated 19 August 1996. The lower court cannot choose to disregard such decretal aspect of the decision and instead implement an obiter dictum.

III.

That part of the decision of the decision of the Court of Appeals resolving the issue of prescription attendant to the appeal of plaintiff against the Ayalas, has been appealed by plaintiff to the Supreme Court by way of a petition for review on certiorari. Not yet being final and executory, the lower court erred in making capital out of the same to dismiss the case against the other defendants, who are the respondents herein.

IV.

The lower court erred in holding, per the questioned orders, that plaintiff's cause of action is for annulment of contract which has already prescribed in the face of the clear and unequivocal recitation of six causes of action in the complaint, none of which is for annulment. This conclusion of public respondent is mani-festly mistaken and legally absurd.

V.

The court a quo erred in failing to consider the complaint recites six alternative causes of action, such that the insufficiency of one cause — assuming there is such insufficiency — does not render insufficient the other cause and the com-plaint itself. The contrary ruling in this regard by public respondent is founded entirely on speculation and conjecture and is constitutive of grave abuse of dis-cretion.

In disposing of the instant petition, this Court shall dwell on the more crucial grounds upon which the trial court and respondent based their respective rulings unfavorable to petitioner MWSS; i.e., prescription, laches, estoppel/ratification and non-joinder of indispensable parties.

RE: Prescription

Petitioner MWSS claims as erroneous both the lower courts' uniform finding that the action has prescribed, arguing that its complaint is one to declare the MWSS-SILHOUETTE sale, and all sub-sequent conveyances of the subject property, void which is imprescriptible.

We disagree.

The very allegations in petitioner MWSS' complaint show that the subject property was sold through contracts which, at most, can be considered only as voidable, and not void. Paragraph 12 of the complaint reads in part:

12. . . . .

The plaintiff has been in continuous, peaceful and public possession and owner-ship of the afore-described properties, the title (TCT No. [36069] 199170) thereto, including its derivative titles TCT Nos. 213872 and 307655, having been duly issued in its name. However, as a result of fraudulent and illegal acts of herein defendants, as described in the paragraphs hereinafter following, the original of said title/s were cancelled and in lieu thereof new titles were issued to corporate defendant/s covering subject 127.9271 hectares. . . . .

Paragraph 34 alleges:

34. Sometime thereafter, clearly influenced by the premature if not questionable approval by Mr. Marcos of a non-existent agreement, and despite full knowl-edge that both the assessed and market value of subject property were much higher, the MWSS Board of Trusties illegally passed an undated resolution

("Resolution No. 36-83"), approving the "sale" of the property to CHGCCI at P40/sq.m. and illegally authorizing General Manager Ilustre to sign the cover-ing contract.

This "resolution" was signed by Messrs. Jesus Hipolito as Chairman; Oscar Ilustre, as Vice Chairman; Aflredo Junio, as Member; and Silvestre Payoyo, as Member; . . . .

Paragraph 53 states:

53. Defendants Pablo Roman, Jr., Josefino Cenizal, and Jose Roxas as well as defendant corporations (CHGCCI, STC and Ayala) who acted through the for-mer and their other principal officers, knowingly induced and caused then Presi-dent Marcos and the former officers of plaintiff MWSS to enter into the afore-said undated "Agreement" which are manifestly and grossly disadvantageous to the government and which gave the same defendants unwarranted benefits, i.e., the ownership and dominion of the afore-described property of plaintiff.

Paragraph 54 avers:

54. Defendants Jesus Hipolito and Alfredo Junio, then public officers, together with the other public officers who are now deceased (Ferdinand Marcos, Oscar Ilustre, and Sivestre Payoyo) knowingly allowed themselves to be persuaded, induced and influenced to approve and/or enter into the aforementioned "Agree-ments" which are grossly and manifestly disadvantageous to the MWSS/gov-ernment and which bestowed upon the other defendants the unwarranted bene-fit/ownership of subject property.

The three elements of a contract — consent, the object, and the cause of obligation 1 are all present. It cannot be otherwise argued that the contract had for its object the sale of the property and the cause or consideration thereof was the price to be paid (on the part of respondents CHGCCI/SIL-HOUETTE) and the land to be sold (on the part of petitioner MWSS). Likewise, petitioner MWSS' consent to the May 11, 1983 and August 11, 1983 Agreements is patent on the face of these docu -ments and on its own resolution No. 36-83.

As noted by both lower courts, petitioner MWSS admits that it consented to the sale of the prop -erty, with the qualification that such consent was allegedly unduly influenced by the President Mar-cos. Taking such allegation to be hypothetically true, such would have resulted in only voidable contracts because all three elements of a contract, still obtained nonetheless. The alleged vitiation of MWSS' consent did not make the sale null and void ab initio. Thus, "a contract where consent is given through mistake, violence, intimidation, undue influence or fraud, is voidable" 2. Contracts "where consent is vitiated by mistake, violence, intimidation, undue influence or fraud" are void-able or annullable 3. These are not void as —

Concepts of Voidable Contracts. — Voidable or anullable contracts are existent, valid, and binding, although they can be annulled because of want of capacity or vitiated consent of the one of the parties, but before annulment, they are ef-fective and obligatory between parties. Hence, it is valid until it is set aside and its validity may be assailed only in an action for that purpose. They can be con-firmed or ratified. 4

As the contracts were voidable at the most, the four year prescriptive period under Art. 1391 of the New Civil Code will apply. This article provides that the prescriptive period shall begin in the cases of intimidation, violence or undue influence, from the time the defect of the consent ceases", and "in case of mistake or fraud, from the time of the discovery of the same time".

Hypothetically admitting that President Marcos unduly influenced the sale, the prescriptive period to annul the same would have begun on February 26, 1986 which this Court takes judicial notice of as the date President Marcos was deposed. Prescription would have set in by February 26, 1990 or more than three years before petitioner MWSS' complaint was failed.

However, if petitioner MWSS' consent was vitiated by fraud, then the prescriptive period com-menced upon discovery. Discovery commenced from the date of the execution of the sale docu-ments as petitioner was party thereto. At the least, discovery is deemed to have taken place on the date of registration of the deeds with the register of Deeds as registration is constructive notice to the world. 5 Given these two principles on discovery, the prescriptive period commenced in 1983 as petitioner MWSS actually knew of the sale, or, in 1984 when the agreements were registered and titles thereafter were issued to respondent SILHOUTTE. At the latest, the action would have pre-scribed by 1988, or about five years before the complaint was instituted. Thus, in Aznar vs. Bernard 6, this Court held that:

Lastly, even assuming that the petitioners had indeed failed to raise the affirma-tive defense of prescription in a motion to dismiss or in an appropriate pleading (answer, or amended or supplemental answer) and an amendment would no longer be feasible, still prescription, if apparent on the face of the complaint, may be favorably considered. In the case at bar, the private respondents admit in their complaint that the contract or real estate mortgage which they alleged to be fraudulent and which had been foreclosed, giving rise to this controversy with the petitioners, was executed on July 17, 1978, or more than eight long years before the commencement of the suit in the court a quo, on September 15, 1986. And an action declare a contract null and void on the ground of fraud must be instituted within four years. Extinctive prescription is thus apparent on the face of the complaint itself as resolved by the Court.

Petitioner MWSS further contends that prescription does not apply as its complaint prayed not for the nullification of voidable contracts but for the declaration of nullity of void ab initio contracts which are imprescriptible. This is incorrect, as the prayers in a complaint are not determinative of what legal principles will operate based on the factual allegations of the complaint. And these fac-tual allegations, assuming their truth, show that MWSS consented to the sale, only that such con-sent was purportedly vitiated by undue influence or fraud. Therefore, the rules on prescription will operate. Even if petitioner MWSS asked for the declaration of nullity of these contracts, the prayers will not be controlling as only the factual allegations in the complaint determine relief. "(I)t is the material allegations of fact in the complaint, not the legal conclusion made therein or the prayer that determines the relief to which the plaintiff is entitled" 7. Respondent court is thus correct in holding that:

xxx xxx xxx

The totality then of those allegations in the complaint makes up a case of a voidable contract of sale — not a void one. The determinative allegations are those that point out that the consent of MWSS in the Agreement of Sale was vi-tiated either by fraud or undue for the declaration of nullity of the said contract because the Complaint says no. Basic is the rule however that it is the body and not the caption nor the prayer of the Complaint that determines the nature of the action. True, the caption and prayer of the Complaint state that the action is for a judicial declaration of nullity of a contract, but alas, as already pointed out, its body unmistakably alleges only a voidable contract. One cannot change the real nature of an action adopting a different nomenclature any more than one can change gin into whisky by just replacing the label on the bottle with that of the latter's and calling it whisky. No matter what, the liquid inside remains gin.

xxx xxx xxx

Petitioner MWSS also theorizes that the May 11, 1983 MWSS-SILHOUTTE Agreement and the August 11, 1983 Supplemental Agreement were void ab initio because the "initial agreement" from which these agreements emanated was executed "without the knowledge, much less the approval" of petitioner MWSS through its Board of Trustees. The "initial agreement" referred to in petitioner MWSS' argument is the December 20, 1982 letter of respondents Roxas and Roman, Jr. to Presi-dent Marcos where the authors mentioned that they had reached an agreement with petitioner's then general manager, Mr. Oscar Ilustre. Petitioner MWSS maintains that Mr. Ilustre was not authorized to enter into such "initial agreement", contrary to Art. 1874 of the New Civil Code which provides that "when a sale of a parcel of land or any interest therein is through an agent, the authority of the latter shall be in writing otherwise the sale shall be void." It then concludes that since its Res. No. 36-83 and the May 11, 1983 and August 11, 1983 Agreements are "fruits" of the "initial agreement" (for which Mr. Ilustre was allegedly not authorized in writing), all of these would have been also void under Art. 1422 of NCC, which provides that a contract which is the direct result of a pro-nounced illegal contract, is also void and inexistent."

The argument does not impress. The "initial agreement" reflected in the December 20, 1982 letter of respondent Roman to Pres. Marcos, is not a sale under Art. 1874. Since the nature of the "initial agreement" is crucial, wequotes 8 the letter in full:

We respectfully approach Your Excellency in all humility and in the spirit of the Yuletide Season. We have explained to Your Excellency when you allowed us the honor to see you, that the negotiations with MWSS which the late Pablo R. Roman initiated way back in 1975, with your kind approval, will finally be con-cluded.

We have agreed in principle with Mr. Oscar Ilustre on the terms of the sale as evidenced by the following:

1. Our written agreement to hire Asian Appraisal Company to appraise the en-tire leased area which then be the basis for the negotiations of the purchase price of the property; and

2. Our exchange of communications wherein made a counter-offer and our acceptance counter-offer.

However, we were informed by Mr. Ilustre that only written instruction from Your Excellency will allow us to finally sign the Agreement.

In sum, our Agreement is for the purchase price of FIFTY-SEVEN MILLION TWO-HUNDRED-FORTY THOUSAND PESOS (P57,240,000) for the entire leased area of 135 hectares; TWENTY-SEVEN MILLION PESOS (P27,000,000) payable upon approval of the contract by Your Excellency and the balance of THIRTY MILLION TWO HUNDRED FORTY THOUSAND PESOS (P30,240,000) after one (1) year inclusive of a 12% interest.

We believe that this arrangement is fair and equitable to both parties consider-ing that the value of the land was appraised by a reputable company and inde-pendent appraisal company jointly commissioned by both parties and consider-

ing further that Capitol Hills has still a 23-year lien on the property by virtue of its existing lease contract with MWSS.

We humbly seek your instruction, Your Excellency and please accept our fami-lies' sincere wish for a Merry Christmas and a Happy New Year to you and the First Family.

The foregoing does not document a sale, but at most, only the conditions proposed by respondent Roman to enter into one. By the terms thereof, it refers only to an "agreement in principle". Reflect-ing a future consummation, the letter mentions "negotiations with MWSS (which) with your (Mar-cos) kind approval, will finally be concluded". It must likewise be noted that presidential approval had yet to be obtained. Thus, the "initial agreement" was not a sale as it did not in any way transfer ownership over the property. The proposed terms had yet to be approval by the President and the agreement in principle still had to be formalized in a deed of sale. Written authority as is required under Art. 1834 of the New Civil Code, was not needed at the point of the "initial agreement".

Verily, the principle on prescription of actions is designed to cover situations such as the case at bar, where there have been a series of transfers to innocent purchasers for value. To set aside these transactions only to accommodate a party who has slept on his rights is anathema to good order. 9

RE: Laches

Even assuming, for argument's sake, that the allegations in the complaint establish the absolute nul-lity of the assailed contracts and hence imprescriptible, the complaint can still be dismissed on the ground of laches which is different from prescription. This Court, as early as 1966, has distin-guished these two concepts in this wise:

. . . (T)he defense of laches applies independently of prescription. Laches is dif-ferent from the statute of limitations. Prescription is concerned with the fact of delay, whereas laches, is concerned with the effect of delay. Prescription is a matter of time; laches is principally a question of inequity of permitting a claim to be enforced, this inequity being founded on some change in the condition of the property or the relation of the parties. Prescription is statutory; laches is not. Laches applies in inequity, whereas prescription applies at law. Prescription is based on fixed-time; laches is not. 10

Thus, the prevailing doctrine is that the right to have a contract declared void ab ini-tio may be barred by laches although not barred by prescription. 11

It has, for all its elements are present, viz:

(1) conduct on the part of the defendant, or one under whom he claims, giving rise to the situation that led to the com-plaint and for which the complaint seeks a remedy;

(2) delay in asserting the complainant's rights, having had knowledge or notice of the defendant's conduct and having been afforded an opportunity to institute a suit;

(3) lack of knowledge or notice on the part of the defendant that the com-

plainant would assert the right on which he bases his suit; and

(4) injury or prejudice to the defendant in the event relief is accorded to the complainant, or the suit is not held barred. 12

There is no question on the presence of the first element. the main thrust of petitioner MWSS's complaint is to bring to the fore what it claims as fraudulent and/or illegal acts of the respondents in the acquisition of the subject property.

The second element of delay is evident from the fact that petitioner tarried for almost ten (10) years from the conclusion of the sale sometime in 1983 before formally laying claim to the subject prop-erty in 1993.

The third element is present as can be deduced from the allegations in the complaint that petitioner MWSS (a) demanded for a downpayment for no less than three times; (b) accepted downpayment for P25 Million; and (c) accepted a letter of credit for the balance. The pertinent paragraphs in the complaint thus read:

38. In a letter dated September 19, 1983, for failure of CHGCCI to pay on time, Mr. Ilustre demanded payment of the downpayment of P25 Million which was due as of 18 April 1983. A copy of this letter is hereto attached as Annex "X";

39. Again, in a letter dated February 7, 1984, then MWSS Acting General Man-ager Aber Canlas demanded payment from CHGCCI of the purchase price long overdue. A copy of this letter is hereto attached as Annex "Y";

40. Likewise, in a letter dated March 14, 1984, Mr. Canlas again demanded from CHGCCI payment of the price. A copy of this demand letter is hereto at-tached as Annex "Z";

41. Thereafter, in a letter dated July 27, 1984, another entity, defendant Ayala Corporation, through SVP Renato de la Fuente, paid with a check the long over-due downpayment of P25,000,000.00 of STC/CHGCCI. Likewise a domestic stand-by letter of credit for the balance was issued in favor of MWSS; Copies of the said letter, check and letter of credit are hereto attached as Annexes "AA", "BB", and "CC", respectively.

Under these facts supplied by petitioner MWSS itself, respondents have every good rea-son to believe that petitioner was honoring the validity of the conveyances of the subject property, and that the sudden institution of the complaint in 1993 alleging the nullity of such conveyances was surely an unexpected turn of events for respondents. Hence, peti-tioner MWSS cannot escape the effect of laches.

RE: Ratification

Pertinent to this issue is the claim of petitioner MWSS that Mr. Ilustre was never given the author-ity by its Board of Trustees to enter into the "initial agreement" of December 20, 1982 and there -fore, the sale of the subject property is invalid.

Petitioner MWSS misses the paint. The perceived infirmity in the "initial agreement" can be cured by ratification. So settled is the precept that ratification can be made by the corporate board either expressly or impliedly. Implied ratification may take various forms — like silence or acquiescence; by acts showing approval or adoption of the contract; or by acceptance and retention of benefits flowing therefrom. 13 Both modes of ratification have been made in this case.

There was express ratification made by the Board of petitioner MWSS when it passed Resolution No. 36-83 approving the sale of the subject property to respondent SILHOUETTE and authorizing Mr. Ilustre, as General Manager, "to sign for and in behalf of the MWSS the contract papers and other pertinent documents relative thereto." Implied ratification by "silence or acquiescence" is re-vealed from the acts of petitioner MWSS in (a) sending three (3) demand letters for the payment of the purchase price, (b) accepting P25 Million as downpayment, and (c) accepting a letter of credit for the balance, as hereinbefore mentioned. It may well be pointed out also that nowhere in peti-tioner MWSS' complaint is it alleged that it returned the amounts, or any part thereof, covering the purchase price to any of the respondents-vendees at any point in time. This is only indicative of pe-titioner MWSS' acceptance and retention of benefits flowing from the sales transactions which is another form of implied ratification.

RE: Non-joinder of indispensable parties

There is no denying that petitioner MWSS' action against herein respondents for the recovery of the subject property now converted into a prime residential subdivision would ultimately affect the pro-prietary rights of the many lot owners to whom the land has already been parceled out. They should have been included in the suit as parties-defendants, for "it is well established that owners of prop-erty over which reconveyance is asserted are indispensable parties without whom no relief is avail-able and without whom the court can render no valid judgment." 14 Being indispensable parties, the absence of these lot-owners in the suit renders all subsequent actions of the trial court null and void for want of authority to act, not only as to the absent parties but even as to those present. 15 Thus, when indispensable parties are not before the court, the action should be dis-missed. 16

WHEREFORE, in view of the foregoing, the consolidated petitions are hereby DENIED.

SO ORDERED.

Regalado and Mendoza, JJ., concur.

Melo and Puno, JJ., took no part.

[G.R. No. 146923.  April 30, 2003]

BANK OF THE PHILIPPINE ISLANDS, petitioners, vs. COURT OF AP-PEALS, NATIONAL LABOR RELATIONS COMMISSION and DIAR’S ASSISTANCE LABOR UNION, respondents.

D E C I S I O N

PANGANIBAN, J.:

When a strict and literal application of the rules on non-forum shopping and verification will result in a patent denial of substantial justice, they may be liberally construed.  This guideline is especially true when the petitioner has satisfactorily explained the lapse and fulfilled the requirements in its motion for reconsideration.

The Case

Before the Court is a Petition for Review[1] under Rule 45 of the Rules of Court, challenging the January 26, 2001 Resolution[2] of the Court of Ap-peals[3] (CA) in CA-GR SP No. 59858.  The Resolution reads as follows:

“Up for consideration is petitioner’s motion for reconsideration of this Court’s resolution of dismissal which was promulgated on August 25, 2000.  Taking note of the comment by the Office of the Solicitor General for the public re-spondent on said motion, the same is hereby denied.  The resolution of dis-missal stands.”[4]

Earlier, in its August 25, 2000 Resolution,[5] the CA[6]  “resolved to DIS-MISS the above-entitled petition on the ground that the verification was signed only by petitioner’s vice-president, sans any board resolution or power of attor-ney authorizing anybody to sign the same and the certificate on non-forum shopping.”[7]

The Facts

On January 30, 1990, 49 workers filed a Complaint[8] against Bank of the Philippine Islands (BPI) and Diar’s Assistance, Inc. (Diar). Docketed as NLRC Case No. 00-01-00580-90, the Complaint was for the “Regularization of Work Status and Preliminary Injunction with Prayer for Restraining Order.”  Com-plainants claimed that they “were working in the respondent BPI performing clerical, messengerial and general utility work as they [had] been assigned  in the bank by their agency x x x Diar’s Assistance, Inc.”[9]

In a Manifestation and Motion[10] filed on February 23, 1990 during the pendency of the case, the 49 workers prayed for the inclusion of 121 more as complainants after the latter had signified their intention to join the union.  Thereafter, the Complaint was amended and the name of the com-plainant changed to that of the organization, Diar’s Employees Labor Union (BPI Unibank Chapter).[11] The union prayed that the employment status of their members be regularized and that BPI be ordered to absorb them as regu-lar employees.

In an Order[12] dated July 18, 1991, Labor Arbiter Pablo C. Espiritu Jr. dis-missed the Complaint.  The dismissal was affirmed by the NLRC[13] and by this Court.[14]

On January 31, 1994, Diar’s Employees Labor Union, through Normando Beguelme (its president) and Jose Laron (a member), filed a new Com-plaint[15] for the declaration of its members as regular employees of BPI.  The

Complaint was docketed as NLRC NCR Case No. 00-01-00829-94.  After Labor Arbiter Potenciano S. Canizares Jr. dismissed the case for lack of merit,[16] the union appealed to the NLRC.  BPI and Diar opposed the appeal and interposed forum shopping as one of their defenses.

The NLRC (First Division) set aside the labor arbiter’s Decision and de-clared complainants as regular employees of BPI.[17]  On the issue of forum shopping, the NLRC ruled thus:

“A check with the record of this case did not show that the complainants in the first case are the same complainants in this third case.  Although the causes of action in the first case and this third case are the same – for the regularization of the members of complainant union – there is no identity of the parties in-volved.  The second case is for injunction and the same is, therefore, not simi-lar to this case.”[18]

Diar and BPI moved for a reconsideration.  In its March 28, 2000 Order,[19] the NLRC denied both Motions:  BPI’s, for being filed beyond the reglemen-tary period; and Diar’s, for lack of merit.

Thereafter, BPI filed with the appellate court a Petition for Certio-rari[20] under Rule 65, assailing the NLRC Decision.  As earlier stated, the CA dismissed the recourse on the ground that the verification has been signed only by petitioner’s vice president, without express authority from any board resolution or power of attorney.

Presently before the CA is a similar Petition (CA-GR SP No. 59093) filed by Diar, BPI’s co-respondent.[21]

Hence this appeal.[22]

Issues

Petitioner submits the following issues for the resolution of this Court:

“1.     Whether or not BPI has a clearly meritorious case so as to warrant the re-view and the declaration as null and void by this Honorable Court of the resolu-tion of the Court of Appeals dismissing BPI’s petition for certiorari on a mere technicality and notwithstanding substantial compliance thereon by BPI in its motion for reconsideration.

“2.     Whether or not this Honorable Court’s Resolution in G.R. No. 129067 which disposed of NLRC NCR Case No. 00-01-00580-90 (FIRST REGULARIZA-TION CASE) constitutes a bar by former judgment to NLRC-NCR Case No. 00-01-00829-94 (SECOND REGULARIZATION CASE) and whether or not the filing of

the SECOND REGULARIZATION CASE violates the prohibition on forum-shop-ping.”[23]

In simpler terms, the issues are as follows (1) whether BPI’s Petition before the CA should have been given due course; and (2) whether the second regu-larization case is barred by res judicata.

The Court’s Ruling

The Petition has merit.

First Issue:Dismissal of the Appeal on Technicality

Petitioner pleads for a liberal construction of the rules on verification and forum shopping.  On the other hand, respondents insist on a strict application of these rules.

The rules on verification and forum shopping are laid out in Sections 4 and 5 of Rule 7 of the Rules of Court, which we quote:

“SEC. 4.  Verification. -- Except when otherwise specifically required by law or rule, pleadings need not be under oath, verified or accompanied by affidavit.

“A pleading is verified by an affidavit that the affiant has read the pleading and that the allegations therein are true and correct of his personal knowledge or based on authentic records.

“A pleading required to be verified which contains a verification based on ‘in-formation and belief’ or upon ‘knowledge, information, and belief,’ or lacks a proper verification, shall be treated as an unsigned pleading.  (As amended, A.M. No. 00-2-10, May 1, 2000.)

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

“Failure to comply with the foregoing requirements shall not be curable by mere amendment of the complaint or other initiatory pleading but shall be cause for the dismissal of the case without prejudice, unless otherwise pro-vided, upon motion and after hearing.  The submission of a false certification or non-compliance with any of the undertakings therein shall constitute indirect contempt of court, without prejudice to the corresponding administrative and criminal actions.  If the acts of the party or his counsel clearly constitute willful and deliberate forum shopping, the same shall be ground for summary dis-missal with prejudice and shall constitute direct contempt, as well as a cause for administrative sanctions.”

It cannot be denied that the BPI Petition before the CA was dismissed, be-cause the verification and the certificate of non-forum shopping had been signed by the vice president of the bank without any board resolution or power of attorney empowering him to do so.

On the other hand, petitioner contends that it did authorize the vice presi-dent to act as its representative, as shown in its Motion for Reconsidera-tion.  However, respondent union argues that his action was ratified by the Ex-ecutive Committee of BPI only on September 6, 2000. Thus, the “belated au-thority” was given 11 days after the 60-day reglementary period for filing a Pe-tition for Certiorari.

After carefully considering the arguments of both parties, we hold that a liberal construction of the rules on verification and forum shopping are in order.

“Verification is simply intended to secure an assurance that the allega-tions in the pleading are true and correct and not the product of the imagina-tion or a matter of speculation, and that the pleading is filed in good faith.”[24]  Meanwhile, the purpose of the aforesaid certification is to prohibit and penalize the evils of forum shopping.[25] We see no circumvention of these objectives by the vice president’s signing the verification and certifica-tion without express authorization from any existing board resolution.

As explained in BPI’s Motion for Reconsideration, he was actually autho-rized to sign the verification and the certification,[26] as shown by the written confirmation attached to the Motion.  Furthermore, he is presumed to know the requirements for validly signing those documents.

“Rules of procedure are used to help secure and not override substantial jus-tice.  Even the Rules of Court mandates a liberal construction in order to pro-mote their objective of securing a just, speedy and inexpensive disposition of every action and proceeding.  Since rules of procedure are mere tools designed to facilitate the attainment of justice, their strict and rigid application which would result in technicalities that tend to frustrate rather than promote sub-stantial justice must always be avoided.  Thus, the dismissal of an appeal on purely, technical ground is frowned upon especially if it will result to unfair-ness.”[27]

We shall not rule on the merits but, in the interest of fair play and the or-derly administration of justice, we find that the reinstatement of the Petition and its consolidation with Diar’s CA appeal is warranted.  BPI is an indispens-able party to the controversy, considering that its inclusion is necessary for the effective and complete resolution of the case.

The fact that respondent union commenced the case against BPI and Diar in a single Complaint is an indication of the indispensability of both parties to the action.  The Rules state that “[p]arties in interest without whom no final de-termination can be had of an action shall be joined either as plaintiffs or defen-dants.”[28]

In BA Finance Corporation v. CA,[29] the Court explained:

“x x x. An indispensable party is one whose interest will be affected by the court's action in the litigation, and without whom no final determination of the case can be had.  The party's interest in the subject matter of the suit and in the relief sought are so inextricably intertwined with the other parties' that his legal presence as a party to the proceeding is an absolute necessity.  In his ab-sence there cannot be a resolution of the dispute of the parties before the court which is effective, complete, or equitable.

“Conversely, a party is not indispensable to the suit if his interest in the contro-versy or subject matter is distinct and divisible from the interest of the other parties and will not necessarily be prejudiced by a judgment which does com-plete justice to the parties in court.  He is not indispensable if his presence would merely permit complete relief between him and those already parties to the action or will simply avoid multiple litigation.

“Without the presence of indispensable parties to a suit or proceeding, judg-ment of a court cannot attain real finality.”[30]

In all stages of an action -- including those involved in motions for recon-sideration, petitions for certiorari and appeals -- the rule on joinder of indis-pensable parties must be extended, as long as such extension is practicable and the reason for it, as explained above, subsists.

The ultimate issue brought up for review in the instant case is: who is the employer of the members of respondent labor union -- BPI, Diar or both?  More-over, a review of the facts of the case reveals that (1) there is a service con-tract between BPI and Diar; (2) Diar pays the salaries of the members of re-spondent union; and (3) the members of respondent union perform their tasks in the premises of BPI.

These facts reveal close factual and legal relationships among respondent union, BPI and Diar -- relationships that are so inextricably intertwined that the issues raised in the Complaint cannot be finally determined without consider-ing the rights of all three parties.  Thus, it is essential that when the case is brought up for review to determine the real employer of the members of re-spondent labor union, all these parties must be heard.

Second Issue:Res Judicata

Unquestionably, any ruling on the issue of res judicata would affect the fi-nal determination on the merits of the Complaint.  This determination will, in turn, affect Diar, which is not impleaded as a party in the present appeal.

Hence, it would not be proper for this Court to resolve the issue of res judi-cata without Diar as a party before it, in view of the pendency of CA-GR SP No. 59093[31] -- a similar petition for the review of the same NLRC Decision, the subject of the case at bar.

A consolidation is thus warranted, based on the foregoing circumstances: BPI and Diar are indispensable parties, who have filed separate but similar pe-titions to review the same NLRC Decision.

WHEREFORE, the Petition is hereby GRANTED, and the assailed Resolu-tions REVERSED and SET ASIDE.  The case is REMANDEDto the Court of Ap-peals, which is DIRECTED to consolidate BPI’s case (CA-GR SP No. 59858) with Diar’s (CA-GR SP No. 59093).  No costs.

SO ORDERED.

Puno, (Chairman), Sandoval-Gutierrez, Corona, and Carpio-Morales, JJ., concur.

G.R. No. 97995 January 21, 1993

PHILIPPINE NATIONAL BANK, petitioner, vs.COURT OF APPEALS AND B.P. MATA AND CO., INC., respondents.

Roland A. Niedo for petitioner.

Benjamin C. Santos Law Office for respondent.

 

ROMERO, J.:

Rarely is this Court confronted with a case calling for the delineation in broad strokes of the dis-tinctions between such closely allied concepts as the quasi-contract called "solutio indebiti" under the venerable Spanish Civil Code and the species of implied trust denominated "constructive trusts," commonly regarded as of Anglo-American origin. Such a case is the one presented to us now which has highlighted more of the affinity and less of the dissimilarity between the two con-cepts as to lead the legal scholar into the error of interchanging the two. Presented below are the factual circumstances that brought into juxtaposition the twin institutions of the Civil Law quasi-contract and the Anglo-American trust.

Private Respondent B.P. Mata & Co. Inc. (Mata), is a private corporation engaged in providing goods and services to shipping companies. Since 1966, it has acted as a manning or crewing agent

for several foreign firms, one of which is Star Kist Foods, Inc., USA (Star Kist). As part of their agreement, Mata makes advances for the crew's medical expenses, National Seaman's Board fees, Seaman's Welfare fund, and standby fees and for the crew's basic personal needs. Subsequently, Mata sends monthly billings to its foreign principal Star Kist, which in turn reimburses Mata by sending a telegraphic transfer through banks for credit to the latter's account.

Against this background, on February 21, 1975, Security Pacific National Bank (SEPAC) of Los Angeles which had an agency arrangement with Philippine National Bank (PNB), transmitted a ca -ble message to the International Department of PNB to pay the amount of US$14,000 to Mata by crediting the latter's account with the Insular Bank of Asia and America (IBAA), per order of Star Kist. Upon receipt of this cabled message on February 24, 1975, PNB's International Department noticed an error and sent a service message to SEPAC Bank. The latter replied with instructions that the amount of US$14,000 should only be for US$1,400.

On the basis of the cable message dated February 24, 1975 Cashier's Check No. 269522 in the amount of US$1,400 (P9,772.95) representing reimbursement from Star Kist, was issued by the Star Kist for the account of Mata on February 25, 1975 through the Insular Bank of Asia and Amer-ica (IBAA).

However, fourteen days after or on March 11, 1975, PNB effected another payment through Cashier's Check No. 270271 in the amount of US$14,000 (P97,878.60) purporting to be another transmittal of reimbursement from Star Kist, private respondent's foreign principal.

Six years later, or more specifically, on May 13, 1981, PNB requested Mata for refund of US$14,000 (P97,878.60) after it discovered its error in effecting the second payment.

On February 4, 1982, PNB filed a civil case for collection and refund of US$14,000 against Mata arguing that based on a constructive trust under Article 1456 of the Civil Code, it has a right to re -cover the said amount it erroneously credited to respondent Mata. 1

After trial, the Regional Trial Court of Manila rendered judgment dismissing the complaint ruling that the instant case falls squarely under Article 2154 on solutio indebiti and not under Article 1456 on constructive trust. The lower court ruled out constructive trust, applying strictly the technical definition of a trust as "a right of property, real or personal, held by one party for the benefit of an -other; that there is a fiduciary relation between a trustee and a cestui que trust as regards certain property, real, personal, money or choses in action." 2

In affirming the lower court, the appellate court added in its opinion that under Article 2154 on so-lutio indebiti, the person who makes the payment is the one who commits the mistake vis-a-vis the recipient who is unaware of such a mistake. 3 Consequently, recipient is duty bound to return the amount paid by mistake. But the appellate court concluded that petitioner's demand for the return of US$14,000 cannot prosper because its cause of action had already prescribed under Article 1145, paragraph 2 of the Civil Code which states:

The following actions must be commenced within six years:

xxx xxx xxx

(2) Upon a quasi-contract.

This is because petitioner's complaint was filed only on February 4, 1982, almost seven years after March 11, 1975 when petitioner mistakenly made payment to private respon-dent.

Hence, the instant petition for certiorari proceeding seeking to annul the decision of the appellate court on the basis that Mata's obligation to return US$14,000 is governed, in the alternative, by ei -ther Article 1456 on constructive trust or Article 2154 of the Civil Code on quasi-contract. 4

Article 1456 of the Civil Code provides:

If property is acquired through mistake or fraud, the person obtaining it is, by force of law, considered a trustee of an implied trust for the benefit of the per-son from whom the property comes.

On the other hand, Article 2154 states:

If something is received when there is no right to demand it, and it was unduly delivered through mistake, the obligation to return it arises.

Petitioner naturally opts for an interpretation under constructive trust as its action filed on February 4, 1982 can still prosper, as it is well within the prescriptive period of ten (10) years as provided by Article 1144, paragraph 2 of the Civil Code. 5

If it is to be construed as a case of payment by mistake or solutio indebiti, then the prescriptive pe-riod for quasi-contracts of six years applies, as provided by Article 1145. As pointed out by the ap-pellate court, petitioner's cause of action thereunder shall have prescribed, having been brought al-most seven years after the cause of action accrued. However, even assuming that the instant case constitutes a constructive trust and prescription has not set in, the present action has already been barred by laches.

To recall, trusts are either express or implied. While express trusts are created by the intention of the trustor or of the parties, implied trusts come into being by operation of law. 6 Implied trusts are those which, without being expressed, are deducible from the nature of the transaction as matters of intent or which are superinduced on the transaction by operation of law as matters of equity, inde-pendently of the particular intention of the parties. 7

In turn, implied trusts are subdivided into resulting and constructive trusts. 8 A resulting trust is a trust raised by implication of law and presumed always to have been contemplated by the parties, the intention of which is found in the nature of the transaction, but not expressed in the deed or in-strument of conveyance. 9 Examples of resulting trusts are found in Articles 1448 to 1455 of the Civil Code. 10 On the other hand, a constructive trust is one not created by words either expressly or impliedly, but by construction of equity in order to satisfy the demands of justice. An example of a constructive trust is Article 1456 quoted above. 11

A deeper analysis of Article 1456 reveals that it is not a trust in the technical sense 12 for in a typi-cal trust, confidence is reposed in one person who is named a trustee for the benefit of another who is called the cestui que trust, respecting property which is held by the trustee for the benefit of the cestui que trust. 13 A constructive trust, unlike an express trust, does not emanate from, or gen-erate a fiduciary relation. While in an express trust, a beneficiary and a trustee are linked by confi-dential or fiduciary relations, in a constructive trust, there is neither a promise nor any fiduciary re -lation to speak of and the so-called trustee neither accepts any trust nor intends holding the property for the beneficiary. 14

In the case at bar, Mata, in receiving the US$14,000 in its account through IBAA, had no intent of holding the same for a supposed beneficiary or cestui que trust, namely PNB. But under Article 1456, the law construes a trust, namely a constructive trust, for the benefit of the person from whom the property comes, in this case PNB, for reasons of justice and equity.

At this juncture, a historical note on the codal provisions on trust and quasi-contracts is in order.

Originally, under the Spanish Civil Code, there were only two kinds of quasi contracts: negotiorum gestio andsolutio indebiti. But the Code Commission, mindful of the position of the eminent Span-ish jurist, Manresa, that "the number of quasi contracts may be indefinite," added Section 3 entitled "Other Quasi-Contracts." 15

Moreover, even as Article 2142 of the Civil Code defines a quasi-contract, the succeeding article provides that: "The provisions for quasi-contracts in this Chapter do not exclude other quasi-con-tracts which may come within the purview of the preceding article." 16

Indubitably, the Civil Code does not confine itself exclusively to the quasi-contracts enumerated from Articles 2144 to 2175 but is open to the possibility that, absent a pre-existing relationship, there being neither crime nor quasi-delict, a quasi-contractual relation may be forced upon the par-ties to avoid a case of unjust enrichment. 17 There being no express consent, in the sense of a meet-ing of minds between the parties, there is no contract to speak of. However, in view of the peculiar circumstances or factual environment, consent is presumed to the end that a recipient of benefits or favors resulting from lawful, voluntary and unilateral acts of another may not be unjustly enriched at the expense of another.

Undoubtedly, the instant case fulfills the indispensable requisites of solutio indebiti as defined in Article 2154 that something (in this case money) has been received when there was no right to de-mand it and (2) the same was unduly delivered through mistake. There is a presumption that there was a mistake in the payment "if something which had never been due or had already been paid was delivered; but he from whom the return is claimed may prove that the delivery was made out of liberality or for any other just cause." 18

In the case at bar, a payment in the corrected amount of US$1,400 through Cashier's Check No. 269522 had already been made by PNB for the account of Mata on February 25, 1975. Strangely, however, fourteen days later, PNB effected another payment through Cashier's Check No. 270271 in the amount of US$14,000, this time purporting to be another transmittal of reimbursement from Star Kist, private respondent's foreign principal.

While the principle of undue enrichment or solutio indebiti, is not new, having been incorporated in the subject on quasi-contracts in Title XVI of Book IV of the Spanish Civil Code entitled "Obliga-tions incurred without contract," 19the chapter on Trusts is fairly recent, having been introduced by the Code Commission in 1949. Although the concept of trusts is nowhere to be found in the Span-ish Civil Code, the framers of our present Civil Code incorporated implied trusts, which includes constructive trusts, on top of quasi-contracts, both of which embody the principle of equity above strict legalism. 20

In analyzing the law on trusts, it would be instructive to refer to Anglo-American jurisprudence on the subject. Under American Law, a court of equity does not consider a constructive trustee for all purposes as though he were in reality a trustee; although it will force him to return the property, it will not impose upon him the numerous fiduciary obligations ordinarily demanded from a trustee of an express trust. 21 It must be borne in mind that in an express trust, the trustee has active duties of management while in a constructive trust, the duty is merely to surrender the property.

Still applying American case law, quasi-contractual obligations give rise to a personal liability ordi-narily enforceable by an action at law, while constructive trusts are enforceable by a proceeding in equity to compel the defendant to surrender specific property. To be sure, the distinction is more procedural than substantive. 22

Further reflection on these concepts reveals that a constructive "trust" is as much a misnomer as a "quasi-contract," so far removed are they from trusts and contracts proper, respectively. In the case of a constructive trust, as in the case of quasi-contract, a relationship is "forced" by operation of law upon the parties, not because of any intention on their part but in order to prevent unjust enrich-ment, thus giving rise to certain obligations not within the contemplation of the parties. 23

Although we are not quite in accord with the opinion that "the trusts known to American and Eng -lish equity jurisprudence are derived from the fidei commissa of the Roman Law," 24 it is safe to state that their roots are firmly grounded on such Civil Law principles are expressed in the Latin

maxim, "Nemo cum alterius detrimento locupletari potest," 25 particularly the concept of construc-tive trust.

Returning to the instant case, while petitioner may indeed opt to avail of an action to enforce a con-structive trust or the quasi-contract of solutio indebiti, it has been deprived of a choice, for prescrip-tion has effectively blocked quasi-contract as an alternative, leaving only constructive trust as the feasible option.

Petitioner argues that the lower and appellate courts cannot indulge in semantics by holding that in Article 1456 the recipient commits the mistake while in Article 2154, the recipient commits no mis-take. 26 On the other hand, private respondent, invoking the appellate court's reasoning, would im-press upon us that under Article 1456, there can be no mutual mistake. Consequently, private re-spondent contends that the case at bar is one of solutio indebiti and not a constructive trust.

We agree with petitioner's stand that under Article 1456, the law does not make any distinction since mutual mistake is a possibility on either side — on the side of either the grantor or the grantee. 27 Thus, it was error to conclude that in a constructive trust, only the person obtaining the property commits a mistake. This is because it is also possible that a grantor, like PNB in the case at hand, may commit the mistake.

Proceeding now to the issue of whether or not petitioner may still claim the US$14,000 it erro-neously paid private respondent under a constructive trust, we rule in the negative. Although we are aware that only seven (7) years lapsed after petitioner erroneously credited private respondent with the said amount and that under Article 1144, petitioner is well within the prescriptive period for the enforcement of a constructive or implied trust, we rule that petitioner's claim cannot prosper since it is already barred by laches. It is a well-settled rule now that an action to enforce an implied trust, whether resulting or constructive, may be barred not only by prescription but also by laches. 28

While prescription is concerned with the fact of delay, laches deals with the effect of unreasonable delay. 29 It is amazing that it took petitioner almost seven years before it discovered that it had er-roneously paid private respondent. Petitioner would attribute its mistake to the heavy volume of in-ternational transactions handled by the Cable and Remittance Division of the International Depart -ment of PNB. Such specious reasoning is not persuasive. It is unbelievable for a bank, and a gov-ernment bank at that, which regularly publishes its balanced financial statements annually or more frequently, by the quarter, to notice its error only seven years later. As a universal bank with world-wide operations, PNB cannot afford to commit such costly mistakes. Moreover, as between parties where negligence is imputable to one and not to the other, the former must perforce bear the conse-quences of its neglect. Hence, petitioner should bear the cost of its own negligence.

WHEREFORE, the decision of the Court of Appeals dismissing petitioner's claim against private respondent is AFFIRMED.

Costs against petitioner.

[G.R. No. 117660.  December 18, 2000]

AGRO CONGLOMERATES, INC. and MARIO SORIANO, petitioners, vs. THE HON. COURT OF APPEALS and REGENT SAVINGS and LOAN BANK, INC., respondents.

D E C I S I O N

QUISUMBING, J.:

This is a petition for review challenging the decision[1] dated October 17, 1994 of the Court of Appeals in CA-G.R. No. 32933, which affirmedin toto the judgment of the Manila Regional Trial Court, Branch 27, in consolidated Cases Nos. 86-37374, 86-37388, 86-37543.

This petition springs from three complaints for sums of money filed by re-spondent bank against herein petitioners.  In the decision of the Court of Ap-peals, petitioners were ordered to pay respondent bank, as follows:

Wherefore, judgment is hereby rendered in favor of plaintiff and against defen-dants, as follows:

1)  In Civil Case No. 86-37374, defendants [petitioners, herein] are or-dered jointly and severally, to pay to plaintiff the amount of P78,212.29, together with interest and service charge thereon, at the rates of 14% and 3% per annum, respectively, computed from November 10, 1982, until fully paid, plus stipulated penalty on un-paid principal at the rate of 6% per annum, computed from No-vember 10, 1982, plus 15% as liquidated damage plus 10% of the total amount due, as attorney’s fees, plus costs;

2)  In Civil Case No. 86-37388, defendant is ordered to pay plaintiff the amount of P632,911.39, together  with interest and service charge thereon at the rate of 14% and 3% per annum, respec-tively, computed from January 15, 1983, until fully paid, plus stipu-lated penalty on unpaid principal at the rate of 6% per annum, computed from January 15, 1983, plus liquidated damages equiva-lent to 15% of the total amount due, plus attorney’s fees equiva-lent to 10% of the total amount due, plus costs; and

3)  In Civil Case No. 86-37543, defendant is ordered to pay plaintiff, on the first cause of action, the amount of P510,000.00, together with interest and service charge thereon, at the rates of 14% and 2% per annum, respectively, computed from March 13, 1983, until fully paid, plus a penalty of 6% per annum, based on the outstand-ing principal of the loan, computed from March 13, 1983, until fully paid; and on the second cause of action, the amount of P494,936.71, together with interest and service charge thereon at the rates of 14% and 2%, per annum, respectively, computed from March 30, 1983, until  fully paid, plus a penalty charge of 6% per annum, based on the unpaid principal, computed from March 30, 1983, until fully paid, plus (on both causes of action) an amount equal to 15% of the total amounts due, as liquidated damages, plus attorney’s fees equal to 10% of the total amounts due, plus costs.[2]

Based on the records, the following are the factual antecedents.

On July 17, 1982, petitioner Agro Conglomerates, Inc. as vendor, sold two parcels of land to Wonderland Food Industries, Inc.  In their Memorandum of Agreement,[3] the parties covenanted that the purchase price of Five Million (P5,000,000.00) Pesos would be settled by the vendee, under the following terms and conditions:  (1) One Million (P1,000,000.00) Pesos shall be paid in cash upon the signing of the agreement; (2)  Two Million (P2,000,000.00) Pesos worth of common shares of stock of the Wonderland Food Industries, Inc.; and  (3) The balance of P2,000,000.00 shall be paid in four equal installments, the first installment falling due, 180 days after the signing of the agreement and every six months thereafter, with an interest  rate of 18% per annum, to be advanced by the vendee upon the signing of the agreement.

On July 19, 1982, the vendor, the vendee, and the respondent bank Re-gent Savings & Loan Bank (formerly Summa Savings & Loan Association), exe-cuted an Addendum[4]to the previous Memorandum of  Agreement.  The new arrangement pertained to the revision of settlement of the initial payments of P1,000,000.00 and prepaid interest of P360,000.00 (18% of P2,000,000.00) as follows:

Whereas, the parties have agreed to qualify the stipulated terms for the pay-ment of the said ONE MILLION THREE HUNDRED SIXTY THOUSAND (P1,360,000.00) PESOS.

WHEREFORE, in consideration of the mutual covenant and agreement of the parties, they do further covenant and agree as follows:

1.  That the VENDEE instead of paying the amount of ONE MILLION THREE HUNDRED SIXTY THOUSAND (P1,360,000.00) PESOS in cash, hereby authorizes the VENDOR to obtain a loan from Summa Savings and Loan Association with office address at Valenzuela, Metro Manila, being represented herein by its President, Mr. Jaime Cariño and referred to hereafter as Financier; in the amount of ONE MILLION THREE HUNDRED SIXTY THOU-SAND  (P1,360,000.00)PESOS, plus interest thereon at such rate as the VENDEE and the Financier may agree, which amount shall cover the ONE MILLION (P1,000,000.00) PESOS cash  which was agreed to be paid upon signing of the Memorandum of Agree-ment, plus 18% interest on the balance of two million pesos stipu-lated upon in Item No. 1(c) of the said agreement; provided how-ever, that said loan shall be made for and in the name of the VEN-DOR.

2.  The VENDEE also agrees that the full amount of ONE MILLION THREE HUNDRED SIXTY THOUSAND (P1,360,000.00) PESOS be paid directly to the VENDOR; however, the VENDEE hereby under-takes to pay the full amount of the said loan to the Financier on such terms and conditions agreed upon by the Financier and the VENDOR, it being understood that while the loan will be secured from and in the name of the VENDOR, the VENDEE will be the one liable to pay the entire proceeds thereof including interest and other charges.[5]

This addendum was not notarized.

Consequently, petitioner Mario Soriano signed as maker several promis-sory notes,[6] payable to the respondent bank.  Thereafter, the bank released the proceeds of the loan to petitioners.  However, petitioners failed to meet their obligations as they fell due.  During that time, the bank was experiencing financial turmoil and was under the supervision of the Central Bank.  Central Bank examiner and liquidator Cordula de Jesus, endorsed the subject promis-sory notes to the bank’s counsel for collection.  The bank gave petitioners op-portunity to settle their account by extending payment due dates.  Mario Sori-ano manifested his intention to re-structure the loan, yet did not show up nor submit his formal written request.

Respondent bank filed three separate complaints before the Regional Trial Court of Manila for Collection of Sums of money.  The correspond-ing case histories are illustrated in the table below:

Date of LoanAmount Payment Due Date

Payment Extension Dates

Civil Case 86-37374   August 12, 1982

 P   78,212.29

 Nov.  10, 1982

 Feb.    8, 1983May    9, 1983Aug.    7, 1983 

Civil Case 86-37388   July 19, 1982

 P 632,911.39

 Jan.    15, 1983

 May   16, 1983Aug.   14, 1983 

Civil Case 86-37543  September 14, 1982     October 1, 1982

 P 510,000.00  P 494,936.71

 March 13, 1983  March 30, 1983

 June   11, 1983Sept.    9, 1983 June   28, 1983Sept.  26, 1983

In their answer, petitioners interposed the defense of novation and insisted there was a valid substitution of debtor.  They alleged that the addendum specifically states that although the promissory notes were in their names, Wonderland shall be responsible for the payment thereof.

The trial court held that petitioners are liable, to wit:

The evidences, however, disclose that Wonderland did not comply with its obli-gation under said ‘Addendum’ (Exh. ‘S’) as the agreement to turn over the farmland to it, did not materialize (57 tsn, May 29, 1990), and there was, actu-ally no sale of the land (58 tsn, ibid).  Hence, Wonderland is not answer-able.  And since the loans obtained under the four promissory notes (Exhs. ‘A’, ‘C’, ‘G’, and ‘E’) have not been paid, despite opportunities given by plaintiff to defendants to make payments, it stands to reason that defendants are liable to pay their obligations thereunder to plaintiff.  In fact, defendants failed to file a third-party complaint against Wonderland, which shows the weakness of its stand that Wonderland is answerable to make said payments.[7]

Petitioners appealed to the Court of Appeals.  The trial court’s decision was affirmed by the appellate court.

Hence, this recourse, wherein petitioners raise the sole issue of:

WHETHER THE COURT OF APPEALS ERRED IN NOT FINDING THAT THE ADDEN-DUM, SIGNED BY THE PETITIONERS, RESPONDENT BANK AND WONDERLAND INC., CONSTITUTES A NOVATION OF THE CONTRACT BY SUBSTITUTION OF DEBTOR, WHICH EXEMPTS THE PETITIONERS FROM ANY LIABILITY OVER THE PROMISSORY NOTES.

Revealed by the facts on record, the conflict among the parties started from a contract of sale of a farmland between petitioners and Wonderland Food Industries, Inc.  As found by the trial court, no such sale materialized.

A contract of sale is a reciprocal transaction.  The obligation or promise of each party is the cause or consideration for the obligation or promise by the other.  The vendee is obliged to pay the price, while the vendor must deliver actual possession of the land.  In the instant case the original plan was that the initial payments would be paid in cash.  Subsequently, the parties (with the participation of respondent bank) executed an addendum providing instead, that the petitioners would secure a loan in the name of Agro Conglomerates Inc. for the total amount of the initial payments, while the settlement of said loan would be assumed by Wonderland.  Thereafter, petitioner Soriano signed several promissory notes and received the proceeds in behalf of petitioner-company.

By this time, we note a subsidiary contract of suretyship had taken effect since petitioners signed the promissory notes as maker and accommodation party for the benefit of Wonderland. Petitioners became liable as accommoda-tion party.  An accommodation party is a person who has signed the instrument as maker, acceptor, or indorser, without receiving value therefor, and for the purpose of lending his name to some other person and is liable on the instru-ment to a holder for value, notwithstanding such holder at the time of taking the instrument knew (the signatory) to be an accommodation party.[8] He has the right, after paying the holder, to obtain reimbursement from the party ac-commodated, since the relation between them has in effect become one of

principal and surety, the accommodation party being the surety.[9] Suretyship is defined as the relation which exists where one person has undertaken an obligation and another person is also under the obligation or other duty to the obligee, who is entitled to but one performance, and as between the two who are bound, one rather than the other should perform.[10] The surety’s liability to the creditor or promisee of the principal is said to be direct, primary and ab-solute; in other words, he is directly and equally bound with the principal.[11] And the creditor may proceed against any one of the solidary debtors.[12]

We do not give credence to petitioners’ assertion that, as provided by the addendum, their obligation to pay the promissory notes was novated by “sub-stitution” of a new debtor, Wonderland.  Contrary to petitioners’ contention, the attendant facts herein do not make a case of novation.

Novation is the extinguishment of an obligation by the substitution or change of the obligation by a subsequent one which extinguishes or modifies the first, either by changing the object or principal conditions, or by substitut-ing another in place of the debtor, or by subrogating a third person in the rights of the creditor.[13] In order that a novation can take place, the concurrence of the following requisites[14] are indispensable:

1)  There must be a previous valid obligation;

2)  There must be an agreement of the parties concerned to a new contract;

3)  There must be the extinguishment of the old contract; and

4)  There must be the validity of the new contract.

In the instant case, the first requisite for a valid novation is lacking. There was no novation by “substitution” of debtor because there was no prior obliga-tion which was substituted by a new contract.  It will be noted that the promis-sory notes, which bound the petitioners to pay, were executed after the adden-dum.  The addendum modified the contract of sale, not the stipulations in the promissory notes which pertain to the surety contract.  At this instance, Won-derland apparently assured the payment of future debts to be incurred by the petitioners.  Consequently, only a contract of surety arose. It was wrong for pe-titioners to presume a novation had taken place.  The well-settled rule is that novation is never presumed,[15] it must be clearly and unequivocally shown.[16]

As it turned out, the contract of surety between Wonderland and the peti-tioners was extinguished by the rescission of the contract of sale of the farm-land.  With the rescission, there was confusion or merger in the persons of the principal obligor and the surety, namely the petitioners herein.  The addendum which was dependent thereon likewise lost its efficacy.

It is true that the basic and fundamental rule in the interpretation of con-tract is that, if the terms thereof are clear and leave no doubt as to the inten-tion of the contracting parties, the literal meaning shall control.  However, in order to judge the intention of the parties, their contemporaneous and subse-quent acts should be considered.[17]

The contract of sale between Wonderland and petitioners did not material-ize.  But it was admitted that petitioners received the proceeds of the promis-sory notes obtained from respondent bank.

Sec. 22 of the Civil Code provides:

Every person who through an act of performance by another, or any other means, acquires or comes into possession of something at the expense of the latter without just or legal ground, shall return the same to him.

Petitioners had no legal or just ground to retain the proceeds of the loan at the expense of private respondent.  Neither could petitioners excuse them-selves and hold Wonderland still liable to pay the loan upon the rescission of their sales contract.  If petitioners sustained damages as a result of the rescis-sion, they should have impleaded Wonderland and asked damages.  The non-inclusion of a necessary party does not prevent the court from proceeding in the action, and the judgment rendered therein shall be without prejudice to the rights of such necessary party.[18] But respondent appellate court did not err in holding that petitioners are duty-bound under the law to pay the claims of respondent bank from whom they had obtained the loan proceeds.

WHEREFORE, the petition is DENIED for lack of merit.  The assailed deci-sion of the Court of Appeals dated October 17, 1994 is AFFIRMED.  Costs against petitioners.

SO ORDERED.

Bellosillo, (Chairman), Mendoza, Buena, and De Leon, Jr., JJ., concur.G.R. No. 117857      February 2, 2001

LUIS S. WONG, petitioner, vs.COURT OF APPEALS and PEOPLE OF THE PHILIPPINES, respondents.

QUISUMBING, J.:

For review on certiorari is the decision dated October 28, 1994 of the Court of Appeals in C.A. G.R. CR 118561which affirmed the decision of the Regional Trial Court of Cebu City, Branch 17, convicting petitioner on three (3) counts of Batas Pambansa Blg. 22 (the Bouncing Checks Law) vi-olations, and sentencing him to imprisonment of four (4) months for each count, and to pay private respondent the amounts of P5,500.00, P6,410.00 and P3,375.00, respectively, corresponding to the value of the checks involved, with the legal rate of interest from the time of filing of the criminal charges, as well as to pay the costs.1âwphi1.nêt

The factual antecedents of the case are as follows:

Petitioner Wong was an agent of Limtong Press. Inc. (LPI), a manufacturer of calendars. LPI would print sample calendars, then give them to agents to present to customers. The agents would get the purchase orders of customers and forward them to LPI. After printing the calendars, LPI would ship the calendars directly to the customers. Thereafter, the agents would come around to collect the payments. Petitioner, however, had a history of unremitted collections, which he duly acknowl-edged in a confirmation receipt he co-signed with his wife.2 Hence, petitioner’s customers were re-quired to issue postdated checks before LPI would accept their purchase orders.

In early December 1985, Wong issued six (6) postdated checks totaling P18,025.00, all dated De-cember 30, 1985 and drawn payable to the order of LPI, as follows:

(1) Allied Banking Corporation (ABC) Check No. 660143464-C for P6,410.00 (Exh. "B");

(2) ABC Check No. 660143460-C for P540.00 (Exh. "C");

(3) ABC Check No. PA660143451-C for P5,500.00 (Exh. "D");

(4) ABC Check No. PA660143465-C for P1,100.00 (Exh. "E");

(5) ABC Check No. PA660143463-C for P3,375.00 (Exh. "F");

(6) ABC Check No. PA660143452-C for P1,100.00 (Exh. "G").

These checks were initially intended to guarantee the calendar orders of customers who failed to is-sue post-dated checks. However, following company policy, LPI refused to accept the checks as guarantees. Instead, the parties agreed to apply the checks to the payment of petitioner’s unremitted collections for 1984 amounting to P18,077.07.3 LPI waived the P52.07 difference.

Before the maturity of the checks, petitioner prevailed upon LPI not to deposit the checks and promised to replace them within 30 days. However, petitioner reneged on his promise. Hence, on June 5, 1986, LPI deposited the checks with Rizal Commercial Banking Corporation (RCBC). The checks were returned for the reason "account closed." The dishonor of the checks was evidenced by the RCBC return slip.

On June 20, 1986, complainant through counsel notified the petitioner of the dishonor. Petitioner failed to make arrangements for payment within five (5) banking days.

On November 6, 1987, petitioner was charged with three (3) counts of violation of B.P. Blg. 224 under three separate Informations for the three checks amounting to P5,500.00, P3,375.00, and P6,410.00.5

The Information in Criminal Case No. CBU-12055 reads as follows:6

That on or about the 30th day of December, 1985 and for sometime subsequent thereto, in the City of Cebu, Philippines, and within the jurisdiction of this Honorable Court, the said accused, knowing at the time of issue of the check she/he does not have sufficient funds in or credit with the drawee bank for the payment of such check in full upon its present-ment, with deliberate intent, with intent of gain and of causing damage, did then and there issue, make or draw Allied Banking Corporation Check No. 660143451 dated 12-30-85 in the amount of P5,500.00 payable to Manuel T. Limtong which check was issued in pay-ment of an obligation of said accused, but when the said check was presented with said bank, the same was dishonored for reason ‘ACCOUNT CLOSED’ and despite notice and demands made to redeem or make good said check, said accused failed and refused, and up to the present time still fails and refuses to do so, to the damage and prejudice of said Manuel T. Limtong in the amount of P5,500.00 Philippine Currency.

Contrary to law.

Petitioner was similarly charged in Criminal Case No. 12057 for ABC Check No. 660143463 in the amount of P3,375.00, and in Criminal Case No. 12058 for ABC Check No. 660143464 for P6,410.00. Both cases were raffled to the same trial court.

Upon arraignment, Wong pleaded not guilty. Trial ensued.

Manuel T. Limtong, general manager of LPI, testified on behalf of the company, Limtong averred that he refused to accept the personal checks of petitioner since it was against company policy to accept personal checks from agents. Hence, he and petitioner simply agreed to use the checks to pay petitioner’s unremitted collections to LPI. According to Limtong, a few days before maturity of the checks, Wong requested him to defer the deposit of said checks for lack of funds. Wong promised to replace them within thirty days, but failed to do so. Hence, upon advice of counsel, he deposited the checks which were subsequently returned on the ground of "account closed."

The version of the defense is that petitioner issued the six (6) checks to guarantee the 1985 calendar bookings of his customers. According to petitioner, he issued the checks not as payment for any obligation, but to guarantee the orders of his customers. In fact, the face value of the six (6) post-dated checks tallied with the total amount of the calendar orders of the six (6) customers of the ac -cused, namely, Golden Friendship Supermarket, Inc. (P6,410.00), New Society Rice and Corn Mill (P5,500.00), Cuesta Enterprises (P540.00), Pelrico Marketing (P1,100.00), New Asia Restaurant P3,375.00), and New China Restaurant (P1,100.00). Although these customers had already paid their respective orders, petitioner claimed LPI did not return the said checks to him.

On August 30, 1990, the trial court issued its decision, disposing as follows:7

"Wherefore, premises considered, this Court finds the accused Luis S. Wong GUILTY be-yond reasonable doubt of the offense of Violations of Section 1 of Batas Pambansa Bilang 22 in THREE (3) Counts and is hereby sentenced to serve an imprisonment of FOUR (4) MONTHS for each count; to pay Private Complainant Manuel T. Limtong the sums of Five Thousand Five Hundred (P5,500.00) Pesos, Six Thousand Four Hundred Ten (P6,410.00) Pesos and Three Thousand Three Hundred Seventy-Five (P3,375.00) Pesos corresponding to the amounts indicated in Allied Banking Checks Nos. 660143451, 66[0]143464 and 660143463 all issued on December 30, 1985 together with the legal rate of interest from the time of the filing of the criminal charges in Court and pay the costs."8

Petitioner appealed his conviction to the Court of Appeals. On October 28, 1994, it affirmed the trial court’s decision in toto.9

Hence, the present petition.10 Petitioner raises the following questions of law -11

May a complainant successfully prosecute a case under BP 22 --- if there is no more con-sideration or price or value – ever the binding tie that it is in contracts in general and in negotiable instruments in particular – behind the checks? – if even before he deposits the checks, he has ceased to be a holder for value because the purchase orders (PO’s) guaran-teed by the checks were already paid?

Given the fact that the checks lost their reason for being, as above stated, is it not then the duty of complainant – knowing he is no longer a holder for value – to return the checks and not to deposit them ever? Upon what legal basis then may such a holder deposit them and get paid twice?

Is petitioner, as the drawer of the guarantee checks which lost their reason for being, still bound under BP 22 to maintain his account long after 90 days from maturity of the checks?

May the prosecution apply the prima facie presumption of "knowledge of lack of funds" against the drawer if the checks were belatedly deposited by the complainant 157 days af-ter maturity, or will it be then necessary for the prosecution to show actual proof of "lack of funds" during the 90-day term?

Petitioner insists that the checks were issued as guarantees for the 1985 purchase orders (PO’s) of his customers. He contends that private respondent is not a "holder for value" considering that the checks were deposited by private respondent after the customers already paid their orders. Instead of depositing the checks, private respondent should have returned the checks to him. Petitioner fur-ther assails the credibility of complainant considering that his answers to cross-examination ques-tions included: "I cannot recall, anymore" and "We have no more record."

In his Comment,12 the Solicitor General concedes that the checks might have been initially in-tended by petitioner to guarantee payments due from customers, but upon the refusal of LPI to ac-cept said personal checks per company policy, the parties had agreed that the checks would be used to pay off petitioner’s unremitted collections. Petitioner’s contention that he did not demand the re -turn of the checks because he trusted LPI’s good faith is contrary to human nature and sound busi-ness practice, according to the Solicitor General.

The issue as to whether the checks were issued merely as guarantee or for payment of petitioner’s unremitted collections is a factual issue involving as it does the credibility of witnesses. Said fac-tual issue has been settled by the trial court and Court of Appeals. Although initially intended to be used as guarantee for the purchase orders of customers, they found the checks were eventually used to settle the remaining obligations of petitioner with LPI. Although Manuel Limtong was the sole witness for the prosecution, his testimony was found sufficient to prove all the elements of the of-fense charged.13 We find no cogent reason to depart from findings of both the trial and appellate courts. In cases elevated from the Court of Appeals, our review is confined to allege errors of law. Its findings of fact are generally conclusive. Absent any showing that the findings by the respon-dent court are entirely devoid of any substantiation on record, the same must stand.14 The lack of accounting between the parties is not the issue in this case. As repeatedly held, this Court is not a trier of facts.15 Moreover, in Llamado v. Court of Appeals,16 we held that "[t]o determine the rea-son for which checks are issued, or the terms and conditions for their issuance, will greatly erode the faith the public reposes in the stability and commercial value of checks as currency substitutes, and bring about havoc in trade and in banking communities. So what the law punishes is the is-suance of a bouncing check and not the purpose for which it was issued nor the terms and condi-tions relating to its issuance. The mere act of issuing a worthless check is  malum prohibitum." Nothing herein persuades us to hold otherwise.

The only issue for our resolution now is whether or not the prosecution was able to establish be-yond reasonable doubt all the elements of the offense penalized under B.P. Blg. 22.

There are two (2) ways of violating B.P. Blg. 22: (1) by making or drawing and issuing a check to apply on account or for value knowing at the time of issue that the check is not sufficiently funded; and (2) by having sufficient funds in or credit with the drawee bank at the time of issue but failing to keep sufficient funds therein or credit with said bank to cover the full amount of the check when presented to the drawee bank within a period of ninety (90) days.17

The elements of B.P. Blg. 22 under the first situation, pertinent to the present case, are:18

"(1) The making, drawing and issuance of any check to apply for account or for value;

(2) The knowledge of the maker, drawer, or issuer that at the time of issue he does not have sufficient funds in or credit with the drawee bank for the payment of such check in full upon its presentment; and

(3) The subsequent dishonor of the check by the drawee bank for insufficiency of funds or credit or dishonor for the same reason had not the drawer, without any valid cause, or -dered the bank to stop payment."

Petitioner contends that the first element does not exist because the checks were not issued to apply for account or for value. He attempts to distinguish his situation from the usual "cut-and-dried" B.P. 22 case by claiming that the checks were issued as guarantee and the obligations they were sup-posed to guarantee were already paid. This flawed argument has no factual basis, the RTC and CA having both ruled that the checks were in payment for unremitted collections, and not as guarantee. Likewise, the argument has no legal basis, for what B.P. Blg. 22 punishes is the issuance of a bouncing check and not the purpose for which it was issued nor the terms and conditions relating to its issuance.19

As to the second element, B.P. Blg. 22 creates a presumption juris tantum that the second ele-ment prima facieexists when the first and third elements of the offense are present.20 Thus, the maker’s knowledge is presumed from the dishonor of the check for insufficiency of funds.21

Petitioner avers that since the complainant deposited the checks on June 5, 1986, or 157 days after the December 30, 1985 maturity date, the presumption of knowledge of lack of funds under Section 2 of B.P. Blg. 22 should not apply to him. He further claims that he should not be expected to keep his bank account active and funded beyond the ninety-day period.

Section 2 of B.P. Blg. 22 provides:

Evidence of knowledge of insufficient funds. – The making, drawing and issuance of a check payment of which is refused by the drawee because of insufficient funds in or credit with such bank, when presented within ninety (90) days from the date of the check, shall be prima facie evidence of knowledge of such insufficiency of funds or credit unless such maker or drawer pays the holder thereof the amount due thereon, or makes arrange-ments for payment in full by the drawee of such check within five (5) banking days after receiving notice that such check has not been paid by the drawee.

An essential element of the offense is "knowledge" on the part of the maker or drawer of the check of the insufficiency of his funds in or credit with the bank to cover the check upon its presentment. Since this involves a state of mind difficult to establish, the statute itself creates a  prima facie pre-sumption of such knowledge where payment of the check "is refused by the drawee because of in-sufficient funds in or credit with such bank when presented within ninety (90) days from the date of the check." To mitigate the harshness of the law in its application, the statute provides that such pre-sumption shall not arise if within five (5) banking days from receipt of the notice of dishonor, the maker or drawer makes arrangements for payment of the check by the bank or pays the holder the amount of the check.22

Contrary to petitioner’s assertions, nowhere in said provision does the law require a maker to main-tain funds in his bank account for only 90 days. Rather, the clear import of the law is to establish a prima facie presumption of knowledge of such insufficiency of funds under the following condi-tions (1) presentment within 90 days from date of the check, and (2) the dishonor of the check and failure of the maker to make arrangements for payment in full within 5 banking days after notice thereof. That the check must be deposited within ninety (90) days is simply one of the conditions for the prima facie presumption of knowledge of lack of funds to arise. It is not an element of the offense. Neither does it discharge petitioner from his duty to maintain sufficient funds in the ac-count within a reasonable time thereof. Under Section 186 of the Negotiable Instruments Law, "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." By current banking practice, a check becomes stale after more than six (6) months,23 or 180 days. Private respondent herein deposited the checks 157 days after the date of the check. Hence said checks cannot be con-

sidered stale. Only the presumption of knowledge of insufficiency of funds was lost, but such knowledge could still be proven by direct or circumstantial evidence. As found by the trial court, private respondent did not deposit the checks because of the reassurance of petitioner that he would issue new checks. Upon his failure to do so, LPI was constrained to deposit the said checks. After the checks were dishonored, petitioner was duly notified of such fact but failed to make arrange -ments for full payment within five (5) banking days thereof. There is, on record, sufficient evidence that petitioner had knowledge of the insufficiency of his funds in or credit with the drawee bank at the time of issuance of the checks. And despite petitioner’s insistent plea of innocence, we find no error in the respondent court’s affirmance of his conviction by the trial court for violations of the Bouncing Checks Law.

However, pursuant to the policy guidelines in Administrative Circular No. 12-2000, which took ef-fect on November 21, 2000, the penalty imposed on petitioner should now be modified to a fine of not less than but not more than double the amount of the checks that were dishonored.

WHEREFORE, the petition is DENIED. Petitioner Luis S. Wong is found liable for violation of Batas Pambansa Blg. 22 but the penalty imposed on him is hereby MODIFIED so that the sen-tence of imprisonment is deleted. Petitioner is ORDERED to pay a FINE of (1) P6,750.00, equiva-lent to double the amount of the check involved in Criminal Case No. CBU-12057, (2) P12,820.00, equivalent to double the amount of the check involved in Criminal Case No. CBU-12058, and (3) P11,000.00, equivalent to double the amount of the check involved in Criminal Case No. CBU-12055, with subsidiary imprisonment24 in case of insolvency to pay the aforesaid fines. Finally, as civil indemnity, petitioner is also ordered to pay to LPI the face value of said checks totaling P18,025.00 with legal interest thereon from the time of filing the criminal charges in court, as well as to pay the costs.1âwphi1.nêt

SO ORDERED.

Bellosillo, Mendoza, Buena, and De Leon, Jr., JJ., concur.

 

G.R. No. 101163 January 11, 1993

STATE INVESTMENT HOUSE, INC., petitioner, vs.COURT OF APPEALS and NORA B. MOULIC, respondents.

Escober, Alon & Associates for petitioner.

Martin D. Pantaleon for private respondents.

 

BELLOSILLO, J.:

The liability to a holder in due course of the drawer of checks issued to another merely as security, and the right of a real estate mortgagee after extrajudicial foreclosure to recover the balance of the obligation, are the issues in this Petition for Review of the Decision of respondent Court of Ap-peals.

Private respondent Nora B. Moulic issued to Corazon Victoriano, as security for pieces of jewelry to be sold on commission, two (2) post-dated Equitable Banking Corporation checks in the amount of Fifty Thousand Pesos (P50,000.00) each, one dated 30 August 1979 and the other, 30 September 1979. Thereafter, the payee negotiated the checks to petitioner State Investment House. Inc. (STATE).

MOULIC failed to sell the pieces of jewelry, so she returned them to the payee before maturity of the checks. The checks, however, could no longer be retrieved as they had already been negotiated. Consequently, before their maturity dates, MOULIC withdrew her funds from the drawee bank.

Upon presentment for payment, the checks were dishonored for insufficiency of funds. On 20 De-cember 1979, STATE allegedly notified MOULIC of the dishonor of the checks and requested that it be paid in cash instead, although MOULIC avers that no such notice was given her.

On 6 October 1983, STATE sued to recover the value of the checks plus attorney's fees and ex-penses of litigation.

In her Answer, MOULIC contends that she incurred no obligation on the checks because the jew-elry was never sold and the checks were negotiated without her knowledge and consent. She also instituted a Third-Party Complaint against Corazon Victoriano, who later assumed full responsibil-ity for the checks.

On 26 May 1988, the trial court dismissed the Complaint as well as the Third-Party Complaint, and ordered STATE to pay MOULIC P3,000.00 for attorney's fees.

STATE elevated the order of dismissal to the Court of Appeals, but the appellate court affirmed the trial court on the ground that the Notice of Dishonor to MOULIC was made beyond the period pre-scribed by the Negotiable Instruments Law and that even if STATE did serve such notice on MOULIC within the reglementary period it would be of no consequence as the checks should never have been presented for payment. The sale of the jewelry was never effected; the checks, therefore, ceased to serve their purpose as security for the jewelry.

We are not persuaded.

The negotiability of the checks is not in dispute. Indubitably, they were negotiable. After all, at the pre-trial, the parties agreed to limit the issue to whether or not STATE was a holder of the checks in due course. 1

In this regard, Sec. 52 of the Negotiable Instruments Law provides —

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 was 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.

Culled from the foregoing, a prima facie presumption exists that the holder of a negotiable instru-ment is a holder in due course. 2 Consequently, the burden of proving that STATE is not a holder in due course lies in the person who disputes the presumption. In this regard, MOULIC failed.

The evidence clearly shows that: (a) on their faces the post-dated checks were complete and regu-lar: (b) petitioner bought these checks from the payee, Corazon Victoriano, before their due dates; 3 (c) petitioner took these checks in good faith and for value, albeit at a discounted price; and, (d) petitioner was never informed nor made aware that these checks were merely issued to payee as security and not for value.

Consequently, STATE is indeed a holder in due course. As such, it holds the instruments free from any defect of title of prior parties, and from defenses available to prior parties among themselves; STATE may, therefore, enforce full payment of the checks. 4

MOULIC cannot set up against STATE the defense that there was failure or absence of considera-tion. MOULIC can only invoke this defense against STATE if it was privy to the purpose for which they were issued and therefore is not a holder in due course.

That the post-dated checks were merely issued as security is not a ground for the discharge of the instrument as against a holder in due course. For the only grounds are those outlined in Sec. 119 of the Negotiable Instruments Law:

Sec. 119. Instrument; how discharged. — A negotiable instrument is dis-charged: (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 con-tract for the payment of money; (e) When the principal debtor becomes the holder of the instrument at or after maturity in his own right.

Obviously, MOULIC may only invoke paragraphs (c) and (d) as possible grounds for the discharge of the instrument. But, the intentional cancellation contemplated under paragraph (c) is that cancel-lation effected by destroying the instrument either by tearing it up, 5 burning it, 6 or writing the word "cancelled" on the instrument. The act of destroying the instrument must also be made by the holder of the instrument intentionally. Since MOULIC failed to get back possession of the post-dated checks, the intentional cancellation of the said checks is altogether impossible.

On the other hand, the acts which will discharge a simple contract for the payment of money under paragraph (d) are determined by other existing legislations since Sec. 119 does not specify what these acts are, e.g., Art. 1231 of the Civil Code 7 which enumerates the modes of extinguishing obligations. Again, none of the modes outlined therein is applicable in the instant case as Sec. 119 contemplates of a situation where the holder of the instrument is the creditor while its drawer is the debtor. In the present action, the payee, Corazon Victoriano, was no longer MOULIC's creditor at the time the jewelry was returned.

Correspondingly, MOULIC may not unilaterally discharge herself from her liability by the mere expediency of withdrawing her funds from the drawee bank. She is thus liable as she has no legal basis to excuse herself from liability on her checks to a holder in due course.

Moreover, the fact that STATE failed to give Notice of Dishonor to MOULIC is of no moment. The need for such notice is not absolute; there are exceptions under Sec. 114 of the Negotiable Instru-ments Law:

Sec. 114. When notice need not be given to drawer. — Notice of dishonor is not required to be given to the drawer in the following cases: (a) Where the drawer and the drawee are the same person; (b) When the drawee is a 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 had countermanded payment.

Indeed, MOULIC'S actuations leave much to be desired. She did not retrieve the checks when she returned the jewelry. She simply withdrew her funds from her drawee bank and transferred them to another to protect herself. After withdrawing her funds, she could not have expected her checks to be honored. In other words, she was responsible for the dishonor of her checks, hence, there was no need to serve her Notice of Dishonor, which is simply bringing to the knowledge of the drawer or indorser of the instrument, either verbally or by writing, the fact that a specified instrument, upon proper proceedings taken, has not been accepted or has not been paid, and that the party notified is expected to pay it. 8

In addition, the Negotiable Instruments Law was enacted for the purpose of facilitating, not hinder -ing or hampering transactions in commercial paper. Thus, the said statute should not be tampered with haphazardly or lightly. Nor should it be brushed aside in order to meet the necessities in a sin-gle case. 9

The drawing and negotiation of a check have certain effects aside from the transfer of title or the in-curring of liability in regard to the instrument by the transferor. The holder who takes the negotiated paper makes a contract with the parties on the face of the instrument. There is an implied represen-tation that funds or credit are available for the payment of the instrument in the bank upon which it is drawn. 10 Consequently, the withdrawal of the money from the drawee bank to avoid liability on the checks cannot prejudice the rights of holders in due course. In the instant case, such withdrawal renders the drawer, Nora B. Moulic, liable to STATE, a holder in due course of the checks.

Under the facts of this case, STATE could not expect payment as MOULIC left no funds with the drawee bank to meet her obligation on the checks, 11 so that Notice of Dishonor would be futile.

The Court of Appeals also held that allowing recovery on the checks would constitute unjust en -richment on the part of STATE Investment House, Inc. This is error.

The record shows that Mr. Romelito Caoili, an Account Assistant, testified that the obligation of Corazon Victoriano and her husband at the time their property mortgaged to STATE was extrajudi-cially foreclosed amounted to P1.9 million; the bid price at public auction was only P1 mil-lion. 12 Thus, the value of the property foreclosed was not even enough to pay the debt in full.

Where the proceeds of the sale are insufficient to cover the debt in an extrajudicial foreclosure of mortgage, the mortgagee is entitled to claim the deficiency from the debtor. 13 The step thus taken by the mortgagee-bank in resorting to an extra-judicial foreclosure was merely to find a proceeding for the sale of the property and its action cannot be taken to mean a waiver of its right to demand payment for the whole debt. 14 For, while Act 3135, as amended, does not discuss the mortgagee's right to recover such deficiency, it does not contain any provision either, expressly or impliedly, prohibiting recovery. In this jurisdiction, when the legislature intends to foreclose the right of a creditor to sue for any deficiency resulting from foreclosure of a security given to guarantee an obligation, it so expressly provides. For instance, with respect to pledges, Art. 2115 of the Civil Code 15 does not allow the creditor to recover the deficiency from the sale of the thing pledged. Likewise, in the case of a chattel mortgage, or a thing sold on installment basis, in the event of fore-closure, the vendor "shall have no further action against the purchaser to recover any unpaid bal-ance of the price. Any agreement to the contrary will be void". 16

It is clear then that in the absence of a similar provision in Act No. 3135, as amended, it cannot be concluded that the creditor loses his right recognized by the Rules of Court to take action for the re-covery of any unpaid balance on the principal obligation simply because he has chosen to extrajudi-cially foreclose the real estate mortgage pursuant to a Special Power of Attorney given him by the mortgagor in the contract of mortgage. 17

The filing of the Complaint and the Third-Party Complaint to enforce the checks against MOULIC and the VICTORIANO spouses, respectively, is just another means of recovering the unpaid bal-ance of the debt of the VICTORIANOs.

In fine, MOULIC, as drawer, is liable for the value of the checks she issued to the holder in due course, STATE, without prejudice to any action for recompense she may pursue against the VIC-TORIANOs as Third-Party Defendants who had already been declared as in default.

WHEREFORE, the petition is GRANTED. The decision appealed from is REVERSED and a new one entered declaring private respondent NORA B. MOULIC liable to petitioner STATE INVEST-MENT HOUSE, INC., for the value of EBC Checks Nos. 30089658 and 30089660 in the total

amount of P100,000.00, P3,000.00 as attorney's fees, and the costs of suit, without prejudice to any action for recompense she may pursue against the VICTORIANOs as Third-Party Defendants.

Costs against private respondent.

SO ORDERED.

G.R. No. 93048 March 3, 1994

BATAAN CIGAR AND CIGARETTE FACTORY, INC., petitioner, vs.THE COURT OF APPEALS and STATE INVESTMENT HOUSE, INC., respondents.

Teresita Gandiongco Oledan for petitioner.

Acaban & Sabado for private respondent.

 

NOCON, J.:

For our review is the decision of the Court of Appeals in the case entitled "State Investment House, Inc. v. Bataan Cigar & Cigarette Factory Inc.," 1 affirming the decision of the Regional Trial Court 2 in a complaint filed by the State Investment House, Inc. (hereinafter referred to as SIHI) for collection on three unpaid checks issued by Bataan Cigar & Cigarette Factory, Inc. (hereinafter re-ferred to as BCCFI). The foregoing decisions unanimously ruled in favor of SIHI, the private re -spondent in this case.

Emanating from the records are the following facts. Petitioner, Bataan Cigar & Cigarette Factory, Inc. (BCCFI), a corporation involved in the manufacturing of cigarettes, engaged one of its suppli-ers, King Tim Pua George (herein after referred to as George King), to deliver 2,000 bales of to-bacco leaf starting October 1978. In consideration thereof, BCCFI, on July 13, 1978 issued crossed checks post dated sometime in March 1979 in the total amount of P820,000.00. 3

Relying on the supplier's representation that he would complete delivery within three months from December 5, 1978, petitioner agreed to purchase additional 2,500 bales of tobacco leaves, despite the supplier's failure to deliver in accordance with their earlier agreement. Again petitioner issued post dated crossed checks in the total amount of P1,100,000.00, payable sometime in September 1979. 4

During these times, George King was simultaneously dealing with private respondent SIHI. On July 19, 1978, he sold at a discount check TCBT 551826 5 bearing an amount of P164,000.00, post dated March 31, 1979, drawn by petitioner, naming George King as payee to SIHI. On December 19 and 26, 1978, he again sold to respondent checks TCBT Nos. 608967 & 608968, 6 both in the amount of P100,000.00, post dated September 15 & 30, 1979 respectively, drawn by petitioner in favor of George King.

In as much as George King failed to deliver the bales of tobacco leaf as agreed despite petitioner's demand, BCCFI issued on March 30, 1979, a stop payment order on all checks payable to George King, including check TCBT 551826. Subsequently, stop payment was also ordered on checks TCBT Nos. 608967 & 608968 on September 14 & 28, 1979, respectively, due to George King's failure to deliver the tobacco leaves.

Efforts of SIHI to collect from BCCFI having failed, it instituted the present case, naming only BC-CFI as party defendant. The trial court pronounced SIHI as having a valid claim being a holder in due course. It further said that the non-inclusion of King Tim Pua George as party defendant is im-material in this case, since he, as payee, is not an indispensable party.

The main issue then is whether SIHI, a second indorser, a holder of crossed checks, is a holder in due course, to be able to collect from the drawer, BCCFI.

The Negotiable Instruments Law states what constitutes a holder in due course, thus:

Sec. 52 — A holder in due course is a holder who has taken the instrument un-der the following conditions:

(a) That it is complete and regular upon its face;

(b) That he became the holder of it before it was overdue, and without notice that it had been previously dishonored, if such was the fact;

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

(d) That at the time it was negotiated to him he had no notice of any infirmity in the instrument or defect in the title of the person negotiating it.

Section 59 of the NIL further states that every holder is deemed prima facie a holder in due course. However, when it is shown that the title of any person who has negotiated the instrument was de -fective, the burden is on the holder to prove that he or some person under whom he claims, ac -quired the title as holder in due course.

The facts in this present case are on all fours to the case of State Investment House, Inc. (the very respondent in this case) v. Intermediate Appellate Court 7 wherein we made a discourse on the ef-fects of crossing of checks.

As preliminary, a check is defined by law as a bill of exchange drawn on a bank payable on de-mand. 8 There are a variety of checks, the more popular of which are the memorandum check, cashier's check, traveler's check and crossed check. Crossed check is one where two parallel lines are drawn across its face or across a corner thereof. It may be crossed generally or specially.

A check is crossed specially when the name of a particular banker or a company is written between the parallel lines drawn. It is crossed generally when only the words "and company" are written or nothing is written at all between the parallel lines. It may be issued so that the presentment can be made only by a bank. Veritably the Negotiable Instruments Law (NIL) does not mention "crossed checks," although Article 541 9 of the Code of Commerce refers to such instruments.

According to commentators, the negotiability of a check is not affected by its being crossed, whether specially or generally. It may legally be negotiated from one person to another as long as the one who encashes the check with the drawee bank is another bank, or if it is specially crossed, by the bank mentioned between the parallel lines. 10 This is specially true in England where the Negotiable Instrument Law originated.

In the Philippine business setting, however, we used to be beset with bouncing checks, forging of checks, and so forth that banks have become quite guarded in encashing checks, particularly those which name a specific payee. Unless one is a valued client, a bank will not even accept second in-dorsements on checks.

In order to preserve the credit worthiness of checks, jurisprudence has pronounced that crossing of a check should have the following effects: (a) the check may not be encashed but only deposited in the bank; (b) the check may be negotiated only once — to one who has an account with a bank; (c) and the act of crossing the check serves as warning to the holder that the check has been issued for a definite purpose so that he must inquire if he has received the check pursuant to that purpose, oth-erwise, he is not a holder in due course. 11

The foregoing was adopted in the case of SIHI v. IAC, supra. In that case, New Sikatuna Wood In-dustries, Inc. also sold at a discount to SIHI three post dated crossed checks, issued by Anita Peña

Chua naming as payee New Sikatuna Wood Industries, Inc. Ruling that SIHI was not a holder in due course, we then said:

The three checks in the case at bar had been crossed generally and issued payable to New Sikatuna Wood Industries, Inc. which could only mean that the drawer had intended the same for deposit only by the rightful person, i.e. the payee named therein. Apparently, it was not the payee who presented the same for payment and therefore, there was no proper presentment, and the liability did not attach to the drawer. Thus, in the absence of due presentment, the drawer did not become liable. Consequently, no right of recourse is available to petitioner (SIHI) against the drawer of the subject checks, private respondent wife (Anita), considering that petitioner is not the proper party authorized to make presentment of the checks in question.

xxx xxx xxx

That the subject checks had been issued subject to the condition that private re-spondents (Anita and her husband) on due date would make the back up deposit for said checks but which condition apparently was not made, thus resulting in the non-consummation of the loan intended to be granted by private respon-dents to New Sikatuna Wood Industries, Inc., constitutes a good defense against petitioner who is not a holder in due course. 12

It is then settled that crossing of checks should put the holder on inquiry and upon him devolves the duty to ascertain the indorser's title to the check or the nature of his possession. Failing in this re-spect, the holder is declared guilty of gross negligence amounting to legal absence of good faith, contrary to Sec. 52(c) of the Negotiable Instruments Law, 13 and as such the consensus of authority is to the effect that the holder of the check is not a holder in due course.

In the present case, BCCFI's defense in stopping payment is as good to SIHI as it is to George King. Because, really, the checks were issued with the intention that George King would supply BCCFI with the bales of tobacco leaf. There being failure of consideration, SIHI is not a holder in due course. Consequently, BCCFI cannot be obliged to pay the checks.

The foregoing does not mean, however, that respondent could not recover from the checks. The only disadvantage of a holder who is not a holder in due course is that the instrument is subject to defenses as if it werenon-negotiable. 14 Hence, respondent can collect from the immediate indorser, in this case, George King.

WHEREFORE, finding that the court a quo erred in the application of law, the instant petition is hereby GRANTED. The decision of the Regional Trial Court as affirmed by the Court of Appeals is hereby REVERSED. Cost against private respondent.

SO ORDERED.

Narvasa, C.J., Regalado and Puno, JJ., concur.

Padilla, J., took no part.

G.R. No. 84281 May 27, 1994

CITYTRUST BANKING CORPORATION, petitioner, vs.THE INTERMEDIATE APPELLATE COURT and EMME HERRERO, respondents.

Agcaoili and Associates for petitioner.

David B. Agoncillo for private respondent.

Humberto B. Basco, collaborating counsel for private respondent.

 

VITUG, J.:

This case emanated from a complaint filed by private respondent Emme Herrero for damages against petitioner Citytrust Banking Corporation. In her complaint, private respondent averred that she, a businesswoman, made regular deposits, starting September of 1979, with petitioner Citytrust Banking Corporation at its Burgos branch in Calamba, Laguna. On 15 May 1980, she deposited with petitioner the amount of Thirty One Thousand Five Hundred Pesos (P31,500.00), in cash, in order to amply cover six (6) postdated checks she issued, viz:

Check No. Amount

007383 — P1,507.00007384 — 1,262.00007387 — 4,299.00007387 — 2,204.00007492 — 6,281.00007400 — 4,716.00

When presented for encashment upon maturity, all the checks were dishonored due to "in-sufficient funds." The last check No. 007400, however, was personally redeemed by pri-vate respondent in cash before it could be redeposited.

Petitioner, in its answer, asserted that it was due to private respondent's fault that her checks were dishonored. It averred that instead of stating her correct account number, i.e., 29000823, in her de-posit slip, she inaccurately wrote 2900823.

The Regional Trial Court (Branch XXXIV) of Calamba, Laguna, on 27 February 1984, dismissed the complaint for lack of merit; thus:

WHEREFORE, judgment is hereby rendered in favor of the defendant and against the plaintiff, DISMISSING the complaint for lack of merit, plaintiff is hereby adjudged to pay the defendant reasonable attorney's fee in the amount of FIVE THOUSAND PESOS (P5,000.00) plus cost of suit.

Private respondent went to the Court of Appeals, which found the appeal meritorious. Hence, it ren-dered judgment, on 15 July 1988, reversing the trial court's decision. The appellate court ruled:

WHEREFORE, the judgment appealed from is REVERSED and a new one en-tered thereby ordering defendant to pay plaintiff nominal damages of P2,000.00, temperate and moderate damages of P5,000.00, and attorney's fees of P4,000.00.

The counterclaim of defendant is dismissed for lack of merit, with costs against him.

Petitioner Citytrust Banking Corporation is now before us in this petition for review on certiorari.

Petitioner bank concedes that it is its obligation to honor checks issued by private respondent which are sufficiently funded, but, it contends, private respondent has also the duty to use her account in accordance with the rules of petitioner bank to which she has contractually acceded. Among such rules, contained in its "brochures" governing current account deposits, is the following printed pro-vision:

In making a deposit . . . kindly insure accuracy in filing said deposit slip forms as we hold ourselves free of any liability for loss due to an incorrect account number indicated in the deposit slip although the name of the depositor is cor-rectly written.

Exactly the same issue was addressed by the appellate court, which, after its deliberations, made the following findings and conclusions: 1

We cannot uphold the position of defendant. For, even if it be true that there was error on the part of the plaintiff in omitting a "zero" in her account number, yet, it is a fact that her name, "Emme E. Herrero", is clearly written on said de-posit slip (Exh. "B"). This is controlling in determining in whose account the deposit is made or should be posted. This is so because it is not likely to commit an error in one's name than merely relying on numbers which are difficult to re-member, especially a number with eight (8) digits as the account numbers of de-fendant's depositors. We view the use of numbers as simply for the convenience of the bank but was never intended to disregard the real name of its depositors. The bank is engaged in business impressed with public interest, and it is its duty to protect in return its many clients and depositors who transact business with it. It should not be a matter of the bank alone receiving deposits, lending out money and collecting interests. It is also its obligation to see to it that all funds invested with it are properly accounted for and duly posted in its ledgers.

In the case before Us, We are not persuaded that defendant bank was not free from blame for the fiasco. In the first place, the teller should not have accepted plaintiff's deposit without correcting the account number on the deposit slip which, obviously, was erroneous because, as pointed out by defendant, it con-tained only seven (7) digits instead of eight (8). Second, the complete name of plaintiff depositor appears in bold letters on the deposit slip (Exh. "B"). There could be no mistaking in her name, and that the deposit was made in her name, "Emma E. Herrero." In fact, defendant's teller should not have fed her deposit slip to the computer knowing that her account number written thereon was wrong as it contained only seven (7) digits. As it happened, according to defen-dant, plaintiff's deposit had to be consigned to the suspense accounts pending verification. This, indeed, could have been avoided at the first instance had the teller of defendant bank performed her duties efficiently and well. For then she could have readily detected that the account number in the name of "Emma E. Herrero" was erroneous and would be rejected by the computer. That is, or should be, part of the training and standard operating procedure of the bank's employees. On the other hand, the depositors are not concerned with banking procedure. That is the responsibility of the bank and its employees. Depositors are only concerned with the facility of depositing their money, earning interest thereon, if any, and withdrawing therefrom, particularly businessmen, like plaintiff, who are supposed to be always "on-the-go". Plaintiff's account is a "current account" which should immediately be posted. After all, it does not earn interest. At least, the forbearance should be commensurated with prompt, efficient and satisfactory service.

Bank clients are supposed to rely on the services extended by the bank, includ-ing the assurance that their deposits will be duly credited them as soon as they are made. For, any delay in crediting their account can be embarrassing to them as in the case of plaintiff.

We agree with plaintiff that —

. . . even in computerized systems of accounts, ways and means are available whereby deposits with erroneous ac-count numbers are properly credited depositor's correct ac-count numbers. They add that failure on the part of the de-fendant to do so is negligence for which they are liable. As proof thereof plaintiff alludes to five particular incidents where plaintiff admittedly wrongly indicated her account number in her deposit slips (Exhs. "J", "L", "N", "O" and "P"), but were nevertheless properly credited her deposit (pp. 4-5, Decision).

We have already ruled in Mundin v. Far East Bank & Trust Co., AC-G.R. CV No. 03639, prom. Nov. 2, 1985, quoting the court a quo in an almost identical set of facts, that —

Having accepted a deposit in the course of its business transactions, it behooved upon defendant bank to see to it and without recklessness — that the depositor was accu-rately credited therefor. To post a deposit in somebody else's name despite the name of the depositor clearly written on the deposit slip is indeed sheer negligence which could have easily been avoided if defendant bank exercised due dili-gence and circumspection in the acceptance and posting of plaintiff's deposit.

We subscribe to the above disquisitions of the appellate court. In Simex International (Manila), Inc. vs. Court of Appeals, 183 SCRA 360, reiterated in Bank of Philippine Islands vs. Intermediate Appellate Court, 206 SCRA 408, we similarly said, in cautioning depository banks on their fidu-ciary responsibility, that —

In every case, the depositor expects the bank to treat his account with utmost fi-delity, whether such account consists only of a few hundred pesos or of mil-lions. The bank must record every single transaction accurately, down to the last centavo, and as promptly as possible. This has to be done if the account is to re-flect at any given time the amount of money the depositor can dispose of as he sees fit, confident that the bank will deliver it as and to whomever he directs. A blunder on the part of the bank, such as the dishonor of a check without good reason, can cause the depositor not a little embarrassment if not also financial loss and perhaps even civil and criminal litigation.

The point is that as a business affected with public interest and because of the nature of its functions, the bank is under obligation to treat the accounts of its depositors with meticulous care, always having in mind the fiduciary nature of their relationship.

We agree with petitioner, however, that it is wrong to award, along with nominal damages, temper-ate or moderate damages. The two awards are incompatible and cannot be granted concurrently. Nominal damages are given in order that a right of the plaintiff, which has been violated or invaded by the defendant, may be vindicated or recognized, and not for the purpose of indemnifying the plaintiff for any loss suffered by him (Art. 2221, New Civil Code; Manila Banking Corp. vs. Inter-mediate Appellate Court, 131 SCRA 271). Temperate or moderate damages, which are more than nominal but less than compensatory damages, on the other hand, may be recovered when the court finds that some pecuniary loss has been suffered but its amount cannot, from the nature of the case, be proved with reasonable certainty (Art. 2224, New Civil Code).

In the instant case, we also find need for vindicating the wrong done on private respondent, and we accordingly agree with the Court of Appeals in granting to her nominal damages but not in simi-larly awarding temperate or moderate damages.

WHEREFORE, the appealed decision is MODIFIED by deleting the award of temperate or moder -ate damages. In all other respects, the appellate court's decision is AFFIRMED. No costs in this in-stance.

SO ORDERED.

Feliciano, Bidin, Romero and Melo, JJ., concur.

THIRD DIVISION

[G.R. No. 110715. December 12, 1997]

ELBERT TAN, Petitioner, v. COURT OF APPEALS AND PEOPLE OF THE PHILIP-PINES, Respondents.

D E C I S I O N

PANGANIBAN, J.:

When an accused files a demurrer to evidence without express leave of court, he is deemed to have waived his right to present his own evidence. Having been unequivocally warned by the trial court that the filing of a demurrer is a waiver of his right to present evidence, herein appellant cannot be allowed to adduce his own after his demurrer is denied.

The Case

Petitioner Elbert Tan assails Respondent Court of Appeals 1 Decision in CA-G.R. CR No. 09883 promulgated on November 27, 1992 affirming in toto the Re-

gional Trial Courts 2 decision 3 which disposed as follows:

WHEREFORE, accused Elbert Tan is found guilty beyond reasonable doubt as principal in the crime of estafa as charged in the aforequoted Information; and in line with the Indeterminate Sentence Law, and there being no aggravating or mitigating circumstance shown to have attended the commission of the crime, he is sentenced to suffer an indeterminate penalty of imprisonment from three (3) years, six (6) months and twenty-one (21) days of prision correc-cional, as minimum, to fourteen (14) years, eight (8) months and one (1) day of reclusion temporal, as maximum, and to pay complainant Mariano S. Macias the sum of P60,000.00 as reparation of the damage caused.

With costs de oficio.

Also assailed in this petition is Respondent Courts 4 Resolution 5 promulgated on June 18, 1993 which denied petitioners motion for reconsideration for lack of merit.

The Facts

Respondent Court reproduced the facts as found by the trial court, as fol-

lows: 6chanroblesvirtuallawlibrary

The evidence shows that, sometime in December 1986, complainant [M]ariano S. Macias read an advertisement in a newspaper offering for sale certain four-wheeler Isuzu trucks. Calling up the advertised telephone number, he was able to talk with accused Elbert Tan, and thereafter, pursuant to their appointment, the complainant went to the place of the accused in Grace Park, presumably in Caloocan City.

Told by Tan that the Isuzu trucks for sale were at the two warehouses of the ac-cused, one in Quezon City and the other in Taft Avenue, Pasay City, the com-plainant decided to see the trucks at the Pasay City warehouse of accused Tan. The complainant and the accused then went to the said warehouse where there were two (2) four-wheeler Isuzu trucks being assembled. Accused Tan represented to the complainant that he owned the trucks and that he was sell-ing them. Macias chose one of the four-wheeler trucks being assembled as the unit he liked. The complainant and the accused then agreed that the com-plainant would buy the said vehicle at the price ofP92,000.00 with P17,000.00 as down payment and the complainants school bus, valued at P65,000.00 to be traded in, and the balance of P10,000.00 to be paid to the accused upon the delivery of the truck to the complainant.

On December 15, 1986, complainant Macias paid to accused Tan the amount of P17,000.00 as down payment, and executed a deed of absolute sale trans-ferring to Tan the complainants school bus at the price of P65,000.00 to be ap-plied as part of the purchase price of the four wheeler Isuzu truck which the complainant bought from the accused.

Subsequently, the mechanic of Macias who was supervising the assembling of the truck purchased by him told the complainant that he suspected that ac-cused Tan was not the owner of the vehicle. Going to the shop where the truck was being assembled to make a verification, the complainant saw a china man named Johnny, supervising the entire shop. Johnny informed the complainant that the trucks in the shop were owned by him and not by accused Tan. Com-plainant immediately called up Tan and told him about what he learned from Johnny, at the same time advising Tan that he was ready to give the balance of P10,000.00. Tan promised to deliver the truck to the complainant but failed to do so. Thereafter, the complainant tried to contact Tan but the accused avoided and refused to see him.

During the preliminary investigation of the charge for estafa filed by Macias in the Office of the City Fiscal of Pasay City, accused Tan paid the complainant the total sum of P22,000.00 and they executed a compromise agreement where Tan promised to return to the complainant the sum of P45,000.00 instead of P65,000.00, corresponding to the value of the school bus of the complainant which the accused could no longer return. In view of this development, the fis-cals office dropped the charge of estafa against Tan. However, accused Tan failed to comply with the terms opf [sic] the compromise agreement and the fiscals office subsequently filed in court an information of estafa against him."

In an Information dated February 29, 1988, Petitioner Elbert Tan was charged with estafa under paragraph 2(a) of Article 315 of the Revised Penal Code al-

legedly committed as follows: 7chanroblesvirtuallawlibrary

That on or about the 15th day of December, 1986, in Pasay City, Metro Manila, x x x, the above-named accused, Elbert Tan, defrauded and deceived Mariano S. Macias in the following manner to wit: that the herein accused, Elbert Tan, knowing fully well that he is not the owner of one Four-Wheeler Isuzu Truck, sold the same for P92,000.00 in favor of herein complainant Mariano S. Macias, and the latter believing the representation that he is the real owner of the four-wheeler Isuzu truck, in fact gave a cash amount of P17,000.00 and the posses-sion and ownership of a second hand school bus, did then and there wilfully, unlawfully and feloniously misapply, misappropriate and convert to his own personal use, benefit and advantage the amount of P17,000.00 and the bus and despite repeated demand failed and refused and still fails and refuses to return the amount of P17,000.00 and the bus to the damage and prejudice of complainant in the total amount of P82,000.00.

During arraignment, petitioner pleaded not guilty. Trial ensued in due course. After the prosecution rested its case, petitioner filed a Motion for Leave to File Demurrer to Evidence dated July 25, 1988. In its Order dated July 29,

1988,8 the trial court disposed of petitioners motion in this wise:

The accused has filed a Motion for Leave to File Demurrer to Evidence, dated July 25, 1988. The Court believes that, under Section 15 of Rule 119 of the 1985 Rules on Criminal Procedure, leave of court to file a demurrer to evidence is not necessary. It lies solely within the discretion of the accused whether or not to file a demurrer to evidence.However, the accused is warned that, pur-suant to the said section, if he files a demurrer to evidence, he is deemed to have waived his right to adduce evidence.

WHEREFORE, the instant motion for leave of court to file a demurrer to evi-dence is not given due course. The Court is leaving it to the discretion of the accused whether or not to file a demurrer to evidence. x x x. (Underscoring supplied.)

Notwithstanding the said order, petitioner subsequently filed a demurrer on the

ground of insufficiency of evidence.9 The prosecution opposed the demurrer contending that the evidence presented could sustain conviction and that the compromise agreement between private complainant and petitioner did not extinguish his criminal liability.

In an Order dated December 9, 1988, the trial court denied petitioners demur-

rer to evidence: 10

In view of all the foregoing, the Demurrer to Evidence dated August 19, 1988, is denied.

Since under section 15, Rule 119, of the 1985 Rules on Criminal Procedure, an accused who files a demurrer to evidence is deemed to have waived his right to present evidence, and under the same section, as amended, which amend-ment took effect on October 1, 1988, an accused who files a demurrer to evi-dence without leave of court is also considered to have abandoned his right to adduce evidence, this case is considered submitted for decision on the basis of the proofs submitted by the prosecution.

However, the prosecution and the defense may submit their respective memo-randa within ten (10) days from receipt of a copy of this order.

Petitioners motion for reconsideration of the above order was likewise denied. On April 28, 1989, the trial court convicted petitioner of the crime charged. His appeal to Respondent Court proved unavailing. Hence, this petition for re-

view. 11chanroblesvirtuallawlibrary

The Issues

Petitioner assails Respondent Courts Decision on the following

grounds: 12chanroblesvirtuallawlibrary

17. The Honorable Court of Appeals has committed grave abuse of discretion amounting to lack of jurisdiction in affirming in toto the decision of the trial court.

18. The Honorable Court of Appeals has decided questions of substance in a way not in accord with law or with the applicable decisions of this Honorable Court.

19. The Honorable Court of Appeals has so far departed from the accepted and usual course of judicial proceedings as to call for an exercise of the power of supervision.

The Solicitor General clarifies the issues as follows:

1. Whether or not there was novation in the case at bar. 13chanroblesvirtu-allawlibrary

2. Whether petitioner has lost his right to present evidence. 14chanroblesvirtu-allawlibrary

We will first resolve the second issue before we examine the substantive de-fense raised by petitioner.

The Courts Ruling

The petition is not meritorious.

First Issue:   May Petitioner Be Allowed to

Present His Evidence?

Petitioner contends that the trial court, instead of granting or denying the Mo-tion for Leave of Court to File Demurrer to Evidence expressly[,] did not give due course to it. Thus, in his memorandum submitted to the trial court, he prayed that the order denying the demurrer be reconsidered or, as an alterna-tive, that the act of not giving due course to the motion for leave to file demur-

rer be considered an implied leave of court. 15

The Solicitor General, representing the People of the Philippines, argues that petitioner cannot avail of the October 1, 1988 amendment [to the Rules of Court] because the same requires that the demurrer to evidence should be made with leave of court; in the present case, the motion for leave was denied

by the trial court. 16 The Solicitor General contends further that Oas vs. Sandi-

ganbayan 17 is inapplicable because the demurrer in that case contained a reservation that it was without prejudice to her right to adduce evidence. Be-cause petitioner in the present case did not make a similar reservation, he has

already lost his right to present evidence. 18

As a rule, the resolution of a motion to dismiss or a demurrer to evidence is left to the exercise of sound judicial discretion. Unless there is a grave abuse thereof amounting to lack or excess of jurisdiction, the trial courts denial of a

motion to dismiss may not be disturbed. 19 The trial court did not give due course to petitioners Motion for Leave to File Demurrer to Evidence. It could not have done otherwise; granting or denying the motion would have served no purpose. The Rules of Court, which were in effect when the trial court acted on the motion for leave to file a demurrer, did not distinguish a demurrer filed with leave of court from one filed without leave. Section 15 of Rule 119 of the Rules of Court at that time read:

Section 15. Demurrer to Evidence. -- When after the prosecution has rested its case, the accused files a motion to dismiss the case on the ground of insuffi-ciency of evidence, he waives the right to present evidence and submits the case for judgment on the basis of the evidence for the prosecution.

In unmistakable terms, the foregoing rule provided that a demurrer to evidence constituted a waiver of the right to adduce evidence. It was immaterial whether a leave of court to file a demurrer was obtained or not.

Thus, the trial court prudently warned petitioner in its Order dated July 29, 1988, that pursuant to the said section, if he files a demurrer to evidence, he is

deemed to have waived his right to adduce evidence. 20 Petitioner ignored such warning and filed a demurrer. In light of the rule in effect at that time, pe-titioner is deemed to have waived his right to adduce evidence for his defense.

Petitioner prays that the Order of the trial court dated July 29, 1988 be consid-ered an implied grant of a leave of court and calls for the application of the new amendments to the Rules of Court in respect of the filing of a demurrer to

evidence. 21 Section 15 of Rule 119 of the Rules of Court as amended in

1988 22 reads:

Sec. 15. Demurrer to evidence. -- After the prosecution has rested its case, the court may dismiss the case on the ground of insufficiency of evidence: (1) on its own initiative after giving the prosecution an opportunity to be heard; or (2) on motion of the accused filed with prior leave of court.

If the court denies the motion for dismissal, the accused may adduce evidence in his defense. When the accused files such motion to dismiss without express leave of court, he waives the right to present evidence and submits the case for judgment on the basis of the evidence for the prosecution. (Underscoring supplied.)

On the basis of the foregoing underscored portion of the Rules, it is clear that petitioners argument is completely bereft of merit. As noted earlier, the July

29, 1988 Order of the trial court was explicit in warning petitioner that the fil-ing of a demurrer was a waiver of his right to adduce evidence. In no way can this order be interpreted as giving petitioner a leave, even an implied one, to present evidence in the event the trial court denied his demurrer. Neverthe-less, petitioner counters that he is merely praying for said order to be consid-ered as an implied leave. We rule, however, that the amendments to Section 15, Rule 119 of the Rules of Court, allows an accused to adduce evidence on his behalf only when he obtained an express leave of court prior to the filing of his demurrer. Hence, even if the July 29, 1988 Order of the trial court were to be interpreted as an implied leave, petitioner would still not acquire the right to present evidence. In clear and unequivocal language, the Rules of Court as amended allow such right only when there is an express leave of court.

Oas vs. Sandiganbayan 23 is not applicable to the present case. Oas demurrer contained a reservation that the demurrer was without prejudice to her right to adduce evidence. When the trial court overruled Oas demurrer, she seasonably took an appeal by certiorari to this Court pleading for a reversal of her convic-tion or for a remand of the case to the trial court to enable her to adduce her evidence. This Court, applying the 1988 amendments to the Rules of Court, granted the petition of Oas and remanded the case to the trial court for recep-tion of her evidence. The Court interpreted such reservation as a prayer for ex-plicit leave to present evidence in case of denial of her demurrer to evidence. In the case at bar, petitioners motion did not contain a similar reservation. Quite the contrary, it bears repeating that the trial court warned petitioner that filing a demurrer to evidence was a waiver of the right to present evidence.

Second Issue:   Is Novation a Defense in Estafa ?

We now deal with the substantive aspect of the case.

Petitioner contends that novation or compromise agreement took place before

the criminal information was filed in court. 24 Thus, he maintains that he did not incur any criminal liability, because up to that time, the original trust rela-tion may be converted x x x into an ordinary creditor-debtor situation, where complainant is barred to insist on the original trust.

Again, petitioners contention is not meritorious. In the first place, novation is not one of the grounds prescribed by the Revised Penal Code for the extinction

of criminal liability. 25 In the second place, it was not shown that there was an unmistakable intent to extinguish the original relationship. Such intent cannot be inferred from the partial satisfaction or payment of the hoodwinked amount. In any event, novation could not extinguish petitioners criminal liability for a

public offense. Thus, we held in People vs. Nery: 26

x x x, it is well-settled that criminal liability for estafa is not affected by com-promise or novation of contract, for it is a public offense which must be prose-cuted and punished by the Government on its own motion though complete reparation should have been made of the damage suffered by the offended party (U.S. vs. Mendozona, 2 Phil. 353; U.S. vs. Ontengco, 4 Phil. 144; U.S. vs. Rodriguez, 9 Phil. 153; People vs. Leachon, 56 Phil. 739; Javier vs. People, 70 Phil. 550). As was said in the case of People vs. Gervacio (G.R. No. L-7705, De-cember 24, 1957), a criminal offense is committed against the People and the

offended party may not waive or extinguish the criminal liability that the law imposes for the commission of the offense. The fact, therefore, that the ac-cused herein had, with the consent of the offended party, assumed the obliga-tion of paying the rentals, which he collected, out of his own salary after he had committed the misappropriation does not obliterate the criminal liability already incurred (People vs. Benitez, L-15923, June 30, 1960).

In this case, the prosecution was able to establish the elements of estafa: (1) the accused defrauded another (a) by abuse of confidence, or (b) by means of deceit; and (2) the offended party or third party suffered damage or prejudice

capable of pecuniary estimation. 27 Estafa was consummated when petitioner falsely pretended to complainant that he owned the Isuzu truck he was selling, and when private complainant delivered the down payment and his school bus to petitioner.

Such liability cannot be modified or extinguished by the execution of a compro-mise agreement or by the partial payment of the sum of P22,000, representing the reimbursement for the down payment of P17,000 and the expense of P5,000 for the transport of the school bus to Manila. The payment merely lessened, but did not extinguish, the civil liability of accused. Hence, in Nery, the subsequent agreement of the accused and the complainant for the payment of the defrauded amount and the partial payment thereof did not to-tally extinguish the civil liability of the accused. The trial court ordered the ac-cused to indemnify the sum of the unpaid balance, and this award was af-firmed by the Supreme Court.

WHEREFORE, premises considered, the petition is DENIED and the assailed De-cision is AFFIRMED in toto. Costs against petitioner.

SO ORDERED.

Narvasa, C.J., (Chairman), Romero, Melo, and Francisco, JJ., concur.

G.R. No. 105188 January 23, 1998

MYRON C. PAPA, Administrator of the Testate Estate of Angela M. Butte, petitioner, vs.A.U. VALENCIA and CO. INC., FELIX PEÑARROYO, SPS. ARSENIO B. REYES & AMANDA SANTOS, and DELFIN JAO, respondents.

 

KAPUNAN, J.:

In this petition for review on certiorari under Rule 45 of the Rules of Court, petitioner Myron C. Papa seeks to reverse and set aside 1) the Decision dated 27 January 1992 of the Court of Appeals which affirmed with modification the decision of the trial court; and 2) the Resolution dated 22 April 1992 of the same court, which denied petitioner's motion for reconsideration of the above de-cision.

The antecedent facts of this case are as follows:

Sometime in June 1982, herein private respondents A.U. Valencia and Co., Inc. (hereinafter referred to as respondent Valencia, for brevity) and Felix Peñarroyo (hereinafter called respondent Peñar-royo), filed with the Regional Trial Court of Pasig, Branch 151, a complaint for specific perfor-

mance against herein petitioner Myron C. Papa, in his capacity as administrator of the Testate Es-tate of one Angela M. Butte.

The complaint alleged that on 15 June 1973, petitioner Myron C. Papa, acting as attorney-in-fact of Angela M. Butte, sold to respondent Peñarroyo, through respondent Valencia, a parcel of land, con-sisting of 286.60 square meters, located at corner Retiro and Cadiz Streets, La Loma, Quezon City, and covered by Transfer Certificate of Title No. 28993 of the Register of Deeds of Quezon City; that prior to the alleged sale, the said property, together with several other parcels of land likewise owned by Angela M. Butte, had been mortgaged by her to the Associated Banking Corporation (now Associated Citizens Bank); that after the alleged sale, but before the title to the subject prop -erty had been released, Angela M. Butte passed away; that despite representations made by herein respondents to the bank to release the title to the property sold to respondent Peñarroyo, the bank refused to release it unless and until all the mortgaged properties of the late Angela M. Butte were also redeemed; that in order to protect his rights and interests over the property, respondent Peñar-royo caused the annotation on the title of an adverse claim as evidenced by Entry No. P.E.-6118/T-28993, inscribed on 18 January 1997.

The complaint further alleged that it was only upon the release of the title to the property, sometime in April 1977, that respondents Valencia and Peñarroyo discovered that the mortgage rights of the bank had been assigned to one Tomas L. Parpana (now deceased), as special administrator of the Estate of Ramon Papa, Jr., on 12 April 1977; that since then, herein petitioner had been collecting monthly rentals in the amount of P800.00 from the tenants of the property, knowing that said prop-erty had already been sold to private respondents on 15 June 1973; that despite repeated demands from said respondents, petitioner refused and failed to deliver the title to the property. Thereupon, respondents Valencia and Peñarroyo filed a complaint for specific performance, praying that peti-tioner be ordered to deliver to respondent Peñarroyo the title to the subject property (TCT 28993); to turn over to the latter the sum of P72,000.00 as accrued rentals as of April 1982, and the monthly rental of P800.00 until the property is delivered to respondent Peñarroyo; to pay respondents the sum of P20,000.00 as attorney's fees; and to pay the costs of the suit.

In his Answer, petitioner admitted that the lot had been mortgaged to the Associated Banking Cor-poration (now Associated Citizens Bank). He contended, however, that the complaint did not state a cause of action; that the real property in interest was the Testate Estate of Angela M. Butte, which should have been joined as a party defendant; that the case amounted to a claim against the Estate of Angela M. Butte and should have been filed in Special Proceedings No. A-17910 before the Pro-bate Court in Quezon City; and that, if as alleged in the complaint, the property had been assigned to Tomas L. Parpana, as special administrator of the Estate of Ramon Papa, Jr., said estate should be impleaded. Petitioner, likewise, claimed that he could not recall in detail the transaction which allegedly occurred in 1973; that he did not have TCT No. 28993 in his possession; that he could not be held personally liable as he signed the deed merely as attorney-in-fact of said Angela M. Butte. Finally, petitioner asseverated that as a result of the filing of the case, he was compelled to hire the services of counsel for a fee of P20,000.00 for which respondents should be held liable.

Upon his motion, herein private respondent Delfin Jao was allowed to intervene in the case. Mak-ing common cause with respondents Valencia and Peñarroyo, respondent Jao alleged that the sub-ject lot which had been sold to respondent Peñarroyo through respondent Valencia was in turn sold to him on 20 August 1973 for the sum of P71,500.00, upon his paying earnest money in the amount of P5,000.00. He, therefore, prayed that judgment be rendered in favor of respondents, the latter in turn be ordered to execute in his favor the appropriate deed of conveyance covering the property in question and to turn over to him the rentals which aforesaid respondents sought to collect from peti-tioner Myron V. Papa.

Respondent Jao, likewise, averred that as a result of petitioner's refusal to deliver the title to the property to respondents Valencia and Peñarroyo, who in turn failed to deliver the said title to him,

he suffered mental anguish and serious anxiety for which he sought payment of moral damages; and, additionally, the payment of attorney's fees and costs.

For his part, petitioner, as administrator of the Testate Estate of Angela M. Butte, filed a third-party complaint against herein private respondents, spouses Arsenio B. Reyes and Amanda Santos (re-spondent Reyes spouses, for short). He averred, among other's that the late Angela M. Butte was the owner of the subject property; that due to non-payment of real estate tax said property was sold at public auction the City Treasurer of Quezon City to the respondent Reyes spouses on 21 January 1980 for the sum of P14,000.00; that the one-year period of redemption had expired; that respon-dents Valencia and Peñarroyo had sued petitioner Papa as administrator of the estate of Angela M. Butte, for the delivery of the title to the property; that the same aforenamed respondents had ac-knowledged that the price paid by them was insufficient, and that they were willing to add a reason-able amount or a minimum of P55,000.00 to the price upon delivery of the property, considering that the same was estimated to be worth P143,000.00; that petitioner was willing to reimburse re-spondents Reyes spouses whatever amount they might have paid for taxes and other charges, since the subject property was still registered in the name of the late Angela M. Butte; that it was in -equitable to allow respondent Reyes spouses to acquire property estimated to be worth P143,000.00, for a measly sum of P14,000.00. Petitioner prayed that judgment be rendered cancel-ing the tax sale to respondent Reyes spouses; restoring the subject property to him upon payment by him to said respondent Reyes spouses of the amount of P14,000.00, plus legal interest; and, or-dering respondents Valencia and Peñarroyo to pay him at least P55,000.00 plus everything they might have to pay the Reyes spouses in recovering the property.

Respondent Reyes spouses in their Answer raised the defense of prescription of petitioner's right to redeem the property.

At the trial, only respondent Peñarroyo testified. All the other parties only submitted documentary proof.

On 29 June 1987, the trial court rendered a decision, the dispositive portion of which reads:

WHEREUPON, judgment is hereby rendered as follows:

1) Allowing defendant to redeem from third-party defendants and ordering the latter to allow the former to redeem the property in question, by paying the sum of P14,000.00 plus legal interest of 12% thereon from January 21, 1980;

2) Ordering defendant to execute a Deed of Absolute Sale in favor of plaintiff Felix Peñarroyo covering the property in question and to deliver peaceful pos-session and enjoyment of the said property to the said plaintiff, free from any liens and encumbrances;

Should this not be possible, for any reason not attributable to defendant, said defendant is ordered to pay to plaintiff Felix Peñarroyo the sum of P45,000.00 plus legal interest of 12% from June 15, 1973;

3) Ordering plaintiff Felix Peñarroyo to execute and deliver to intervenor a deed of absolute sale over the same property, upon the latter's payment to the former of the balance of the purchase price of P71,500.00;

Should this not be possible, plaintiff Felix Peñarroyo is ordered to pay inter-venor the sum of P5,000.00 plus legal interest of 12% from August 23, 1973; and

4) Ordering defendant to pay plaintiffs the amount of P5,000.00 for and as at-torney's fees and litigation expenses.

SO ORDERED. 1

Petitioner appealed the aforesaid decision of the trial court to the Court of Appeals, alleging among others that the sale was never "consummated" as he did not encash the check (in the amount of P40,000.00) given by respondents Valencia and Peñarroyo in payment of the full purchase price of the subject lot. He maintained that what said respondent had actually paid was only the amount of P5,000.00 (in cash) as earnest money.

Respondent Reyes spouses, likewise, appealed the above decision. However, their appeal was dis-missed because of failure to file their appellant's brief.

On 27 January 1992, the Court of Appeals rendered a decision, affirming with modification the trial court's decision, thus:

WHEREFORE, the second paragraph of the dispositive portion of the appealed decision is MODIFIED, by ordering the defendant-appellant to deliver to plain-tiff-appellees the owner's duplicate of TCT No. 28993 of Angela M. Butte and the peaceful possession and enjoyment of the lot in question or, if the owner's duplicate certificate cannot be produced, to authorize the Register of Deeds to cancel it and issue a certificate of title in the name of Felix Peñarroyo. In all other respects, the decision appealed from is AFFIRMED. Costs against defen-dant-appellant Myron C. Papa.

SO ORDERED. 2

In affirming the trial court's decision, respondent court held that contrary to petitioner's claim that he did not encash the aforesaid check, and therefore, the sale was not consummated, there was no evidence at all that petitioner did not, in fact, encash said check. On the other hand, respondent Peñarroyo testified in court that petitioner Papa had received the amount of P45,000.00 and issued receipts therefor. According to respondent court, the presumption is that the check was encashed, especially since the payment by check was not denied by defendant-appellant (herein petitioner) who, in his Answer, merely alleged that he "can no longer recall the transaction which is supposed to have happened 10 years ago." 3

On petitioner's claim that he cannot be held personally liable as he had acted merely as attorney-in-fact of the owner, Angela M. Butte, respondent court held that such contention is without merit. This action was not brought against him in his personal capacity, but in his capacity as the adminis -trator of the Testate Estate of Angela M. Butte. 4

On petitioner's contention that the estate of Angela M. Butte should have been joined in the action as the real party in interest, respondent court held that pursuant to Rule 3, Section 3 of the Rules of Court, the estate of Angela M. Butte does not have to be joined in the action. Likewise, the estate of Ramon Papa, Jr., is not an indispensable party under Rule 3, Section 7 of the same Rules. For the fact is that Ramon Papa, Jr., or his estate, was not a party to the Deed of Absolute Sale, and it is ba -sic law that contracts bind only those who are parties thereto. 5

Respondent court observed that the conditions under which the mortgage rights of the bank were assigned are not clear. In any case, any obligation which the estate of Angela M. Butte might have to the estate of Ramon Papa, Jr. is strictly between them. Respondents Valencia and Peñarroyo are not bound by any such obligation.

Petitioner filed a motion for reconsideration of the above decision, which motion was denied by re-spondent Court of Appeals.

Hence, this petition wherein petitioner raises the following issues:

I. THE CONCLUSION OR FINDING OF THE COURT OF APPEALS THAT THE SALE IN QUESTION WAS CONSUMMATED IS GROUNDED ON SPECULATION OR CONJECTURE, AND IS CONTRARY TO THE APPLI-CABLE LEGAL PRINCIPLE.

II. THE COURT OF APPEALS, IN MODIFYING THE DECISION OF THE TRIAL COURT, ERRED BECAUSE IT, IN EFFECT, CANCELLED OR NULLIFIED AN ASSIGNMENT OF THE SUBJECT PROPERTY IN FAVOR OF THE ESTATE OF RAMON PAPA, JR. WHICH IS NOT A PARTY IN THIS CASE.

III. THE COURT OF APPEALS ERRED IN NOT HOLDING THAT THE ES-TATE OF ANGELA M. BUTTE AND THE ESTATE OF RAMON PAPA, JR. ARE INDISPENSABLE PARTIES IN THIS CASE. 6

Petitioner argues that respondent Court of Appeals erred in concluding that alleged sale of the sub-ject property had been consummated. He contends that such a conclusion is based on the erroneous presumption that the check (in the amount of P40,000.00) had been cashed, citing Art. 1249 of the Civil Code, which provides, in part, that payment by checks shall produce the effect of payment only when they have been cashed or when through the fault of the creditor they have been im-paired. 7 Petitioner insists that he never cashed said check; and, such being the case, its delivery never produced the effect of payment. Petitioner, while admitting that he had issued receipts for the payments, asserts that said receipts, particularly the receipt of PCIB Check No. 761025 in the amount of P40,000.00, do not prove payment. He avers that there must be a showing that said check had been encashed. If, according to petitioner, the check had been encashed, respondent Peñarroyo should have presented PCIB Check No. 761025 duly stamped received by the payee, or at least its microfilm copy.

Petitioner finally avers that, in fact, the consideration for the sale was still in the hands of respon -dents Valencia and Peñarroyo, as evidenced by a letter addressed to him in which said respondents wrote, in part:

. . . Please be informed that I had been authorized by Dr. Ramon Papa, Jr., heir of Mrs. Angela M. Butte to pay you the aforementioned amount of P75,000.00 for the release and cancellation of subject property's mortgage. The money is with me and if it is alright with you, I would like to tender the payment as soon as possible. . . . 8

We find no merit in petitioner's arguments.

It is an undisputed fact that respondents Valencia and Peñarroyo had given petitioner Myron C. Papa the amounts of Five Thousand Pesos (P5,000.00) in cash on 24 May 1973, and Forty Thou-sand Pesos (P40,000.00) in check on 15 June 1973, in payment of the purchase price of the subject lot. Petitioner himself admits having received said amounts, 9 and having issued receipts there-for. 10 Petitioner's assertion that he never encashed the aforesaid check is not substantiated and is at odds with his statement in his answer that "he can no longer recall the transaction which is sup-posed to have happened 10 years ago." After more than ten (10) years from the payment in party by cash and in part by check, the presumption is that the check had been encashed. As already stated, he even waived the presentation of oral evidence.

Granting that petitioner had never encashed the check, his failure to do so for more than ten (10) years undoubtedly resulted in the impairment of the check through his unreasonable and unex-plained delay.

While it is true that the delivery of a check produces the effect of payment only when it is cashed, pursuant to Art. 1249 of the Civil Code, the rule is otherwise if the debtor is prejudiced by the cred-itor's unreasonable delay in presentment. The acceptance of a check implies an undertaking of due diligence in presenting it for payment, and if he from whom it is received sustains loss by want of such diligence, it will be held to operate as actual payment of the debt or obligation for which it was given. 11 It has, likewise, been held that if no presentment is made at all, the drawer cannot be held liable irrespective of loss or injury 12 unless presentment is otherwise excused. This is in har-mony with Article 1249 of the Civil Code under which payment by way of check or other nego-tiable instrument is conditioned on its being cashed, except when through the fault of the creditor, the instrument is impaired. The payee of a check would be a creditor under this provision and if its no-payment is caused by his negligence, payment will be deemed effected and the obligation for which the check was given as conditional payment will be discharged. 13

Considering that respondents Valencia and Peñarroyo had fulfilled their part of the contract of sale by delivering the payment of the purchase price, said respondents, therefore, had the right to com-pel petitioner to deliver to them the owner's duplicate of TCT No. 28993 of Angela M. Butte and the peaceful possession and enjoyment of the lot in question.

With regard to the alleged assignment of mortgage rights, respondent Court of Appeals has found that the conditions under which said mortgage rights of the bank were assigned are not clear. In-deed, a perusal of the original records of the case would show that there is nothing there that could shed light on the transactions leading to the said assignment of rights; nor is there any evidence on record of the conditions under which said mortgage rights were assigned. What is certain is that de-spite the said assignment of mortgage rights, the title to the subject property has remained in the name of the late Angela M. Butte. 14 This much is admitted by petitioner himself in his answer to respondent's complaint as well as in the third-party complaint that petitioner filed against respon-dent-spouses Arsenio B. Reyes and Amanda Santos. 15 Assuming arquendo that the mortgage rights of the Associated Citizens Bank had been assigned to the estate of Ramon Papa, Jr., and granting that the assigned mortgage rights validly exists and constitute a lien on the property, the estate may file the appropriate action to enforce such lien. The cause of action for specific perfor -mance which respondents Valencia and Peñarroyo have against petitioner is different from the cause of action which the estate of Ramon Papa, Jr. may have to enforce whatever rights or liens it has on the property by reason of its being an alleged assignee of the bank's rights of mortgage.

Finally, the estate of Angela M. Butte is not an indispensable party. Under Section 3 of Rule 3 of the Rules of Court, an executor or administrator may sue or be sued without joining the party for whose benefit the action is presented or defended, thus:

Sec. 3. Representative parties. — A trustee of an express trust, a guardian, ex-ecutor or administrator, or a party authorized by statute, may sue or be sued without joining the party for whose benefit the action is presented or defended; but the court may, at any stage of the proceedings, order such beneficiary to be made a party. An agent acting in his own name and for the benefit of an undis-closed principal may sue or be sued without joining the principal except when the contract involves things belonging to the principal. 16

Neither is the estate of Ramon Papa, Jr. an indispensable party without whom, no final determina-tion of the action can be had. Whatever prior and subsisting mortgage rights the estate of Ramon Papa, Jr. has over the property may still be enforced regardless of the change in ownership thereof.

WHEREFORE, the petition for review is hereby DENIED and the Decision of the Court of Ap-peals, dated 27 January 1992 is AFFIRMED.

SO ORDERED.

Davide, Jr., Bellosillo and Vitug, JJ., concur.

 

G.R. No. 132648 March 4, 1999

GOVERNMENT SERVICE INSURANCE SYSTEM (GSIS), petitioner, vs.COURT OF APPEALS and ROMEO S. BELLA, respondents.

 

PURISIMA, J.:

At bar is a Petition for Review on Certiorari under Rule 45 of the Revised Rules of Court seeking to set aside the Decision 1 of the Court of Appeals 2 dated February 12, 1998 in CA-G.R. SP NO. 44465, reversing the Decision of the Government Service Insurance System (GSIS), which af-firmed the Decision of the Employees Compensation Commission (ECC) in ECC Case No. M.G. 7872 - 1295.

The antecedent facts are, as follows:

On June 10, 1964, private respondent Romeo S. Bella was employed by the Bureau of Animal In-dustry as a livestock inspector. He retired from the service on August 16, 1986. On July 16, 1987, he was re-employed by the Department of Agriculture as Agricultural Food Technologist and on March 1, !994, promoted to the position of Agriculturist II.

As disclosed by his records of employment, private respondent was suspended without pay from September 1, 1993 to March 1, 1994. A month after, or on April 1, 1994, to be precise, he was rein -stated to his former position as Agriculturist II at the Provincial Agricultural Office in Tacurong, Sultan Kudarat. On July 1, 1995, private respondent who was then 56 3 years old, filed a terminal leave of absence due to physical disability.

The medical records of private respondent reveal that he was suffering from Acute Myocardial In-fraction 4 and was confined at the Notre Dame Hospital in Cotabato City from September 13, 1988 to September 19, 1988 and at the Philippine Heart Center from September 6, 1994 to September 26, 1994.

Thus, private respondent filed with the GSIS Cotabato Branch, a claim for compensation benefits under P.D. 626,5 as amended. Finding his application meritorious and his ailment compensable, the GSIS awarded him a Temporary Total Disability income benefit during the periods of July 16 to July 21, 1994 and August 24 to August 29, 1994, as well as reimbursement for medical expenses. Private respondent Romeo S. Bella was also granted a Permanent Partial Disability income benefit equivalent to thirty-eight (38) months for his Ischemic Cardiomayopathy.

Private respondent requested for the conversion of his benefits from Permanent Partial Disability to Permanent Total Disability, reasoning out that his ailments of Ischemic Cardiomayopathy 6 and Chronic Obstructure Pulmonary Disease 7 rendered him unable to engage in any gainful occupation for a continuous period exceeding 120 days, as certified to by his attending physicians, Dr. Romulo Uy, Dr. Anne Marie Luat, Dr. Danilo Rustia, Dr. Juanito Lastimosa and Dr. Eldefonso Maglasang. 8

But petitioner GSIS denied his request for Permanent Total Disability on the ground that the degree of private respondent's disability as evaluated by, petitioner's medical officers, did not satisfy the criteria for Permanent Total Disability. His motion for reconsideration was similarly denied. On ap-peal, the Employees Compensation Commission (ECC) affirmed the Decision of the GSIS, denying private respondent's request for conversion of his Permanent Partial Disability benefit to Permanent Total Disability benefit.

Dissatisfied, private respondent went to the Court of Appeals on a Petition for Review.

On February 12, 1998, the Court of Appeals came out with its decision reversing the Decision of the Employees Compensation Commission; disposing, thus:

WHEREFORE, the appealed decision is hereby REVERSED and SET ASIDE. Accordingly, another judgment is rendered granting petitioner's claim for Per-manent Total Disability (PTD) benefits.

No Pronouncements as to costs.

SO ORDERED. 9

Therefrom, petitioner GSIS found its way to this Court via the present petition, theorizing:

I

THAT THE RESPONDENT HONORABLE COURT OF APPEALS GRAVELY ERRED IN REVERSING AND SETTING ASIDE THE DECI-SION OF THE EMPLOYEES COMPENSATION COMMISSION WHICH AFFIRMED THE DECISION OF HEREIN PETITIONER GSIS.

II

THAT THE HONORABLE COURT OF APPEALS ERRED IN CONSIDER-ING THE CONVERSION OF PERMANENT PARTIAL DISABILITY (PPD) BENEFITS OF HEREIN RESPONDENT TO PERMANENT TOTAL DIS-ABILITY UNDER P.D. 626, AS AMENDED.

III

THAT THE DECISION OF THE RESPONDENT HONORABLE COURT OF APPEALS IS CONTRARY TO LAW AND APPLICABLE JURISPRU-DENCE.

The pivot of inquiry here is: whether or riot the private respondent is entitled to permanent total disability benefits.

The labor Code classifies employees' disability into three distinct categories, namely: a) temporary total disability;10 b) permanent total disability; 11 and c) permanent partial disability. 12 Section 2, Rule VII, of the Rules and Regula-tion Implementing Title II, Book IV of the Labor Code defines and clarifies these categories, as fol-lows:

Sec. 2. Disability. — (a) A total disability is temporary if as a result of the injury or sickness the employee is unable to perform any gainful occupation for a con-tinuous period not exceeding 120 days, except as otherwise provided for in Rule X of these Rules.

(b) A disability is total and permanent if as a result of the injury or sickness the employee is unable to perform any gainful occupation for a continuous period exceeding 120 days except as otherwise provided for in Rule X13 of these Rules.

(c) A disability is partial and permanent if as a result of the injury or sickness the employee suffers a permanent partial loss of the use of any part of his body.

In Vicente vs. Employees Compensation Commission, 14 the Court laid down the litmus test and distinction between Permanent Total Disability and Permanent Partial Disability, to wit:

. . . While "permanent total disability" invariably results in an employee's loss of work or inability to perform his usual work, "permanent partial disability," on the other hand, occurs when an employee loses the use of any particular anatomical part of his body which disables him to continue with his former work. Stated otherwise, the test of whether or not an employee suffers from "permanent total disability" is a showing of the capacity of the employee to continue performing his work notwithstanding the disability he incurred. Thus, if by, reason of the injury or sickness he sustained, the employee is unable to perform his customary job for more than 120 days and he does not come within the coverage of Rule X of the Amended Rules on Employees Compensability (which, in a more detailed manner, describes what constitutes temporary total disability). then the said employee undoubtedly suffers from "permanent total disability" regardless of whether or not he loses the use of any part of his body. 15

To justify its finding that private respondent's disability cannot be a Permanent Total Disability, the ECC ratiocinated:

. . . Under the ECC Schedule of Compensation, appellant was already awarded the maximum benefits commensurate to the degree of his disability. Under this schedule, appellant's Ischemlc Cardiomyopathy merits a disability rating of 38 months Permanent Partial Disability (PPD), and this has already been granted him. The nature of his ailment and his present physical condition which the medical officers of the System were able to evaluate when he came to follow-up his request showed that the criteria for Permanent Total Disability (PTD) like the permanent complete paralysis of two limbs has not been satisfied. Thus, we see no reason to alter the earlier ruling of the respondent System 16

Petitioner contends that the criteria for Permanent Total Disability, like permanent complete paraly-sis of two, limbs have not been met 17 by private respondent's ailment and physical condition. As aptly pointed out by the Solicitor General, "total disability does not mean a state of absolute help -lessness, but disablement of an employee to earn wages in the same kind of work or a work of simi-lar nature, that he was trained or accustomed to perform, or any kind of work which a person of his mentality and attachments could do. 18 The fact that he was forced to retire at the early age of 56, due to a sickness disabling him from performing his job as Agriculturist II, qualifies his disability as a Permanent Total Disability, though he lost no use of any particular anatomical part of his body.

So also, no less than five doctors certified that private respondent's illness disabled him from per -forming any gainful occupation for a continuous period exceeding 120 days. Then too, even peti -tioner GSIS granted private respondent an income benefit amounting to the equivalent of 38 months. Well settled is the rule that a physician's report of sickness or accident substantiates the dis-ability claim. 19 "A doctor's certification as to the nature of the claimant's disability may be given credence as he would not normally make false certification for the sake of a lowly school teacher." 20

It is then beyond cavil that the sickness of the private respondent made him unable to perform any gainful occupation for a continuous period exceeding 120 days, thus entitling him to permanent to-tal disability benefits.

Clearly, the position taken by the GSIS and the ECC runs counter to the avowed policy of the State to construe social legislations liberally in favor of the beneficiaries. "The court takes this occasion to stress once more its abiding concern for the welfare of the government workers, especially the humble rank and file, whose patience, industry and dedication to duty have often gone unheralded, but who, in spite of every little recognition, plod on dutifully to perform their appointed tasks. It is

for this reason that the sympathy of the law on social security is toward its beneficiaries, and the law, by its own terms, requires a construction of utmost liberality in their favor." 21

Sec. 18, Article II of the Constitution, provides:

Sec. 18. The State affirms labor as a primary social economic force. It shall pro-tect the rights of workers and promote their welfare.

All things studiedly considered, we are of the ineluctable conclusion that the Court of Appeals erred not in granting private respondent's claim for Permanent Total Disability benefits.

WHEREFORE, the petition is hereby DENIED, and the assailed Decision of the Court of Appeals in CA-G.R. SP NO. 44465 AFFIRMED. No pronouncement as to costs.

SO ORDERED.

Romero and Gonzaga-Reyes, JJ., concur.

Vitug, J., abroad on official business.

Panganiban, J., is on leave.