SECOND DIVISION paragraph paragraph paragraph

[ G . R . No . 93397 . March 3 , 1997 ] paragraph paragraph paragraph

TRADERS ROYAL BANK , petitioner , vs . COURT OF APPEALS , FILRITERS GUARANTY ASSURANCE CORPORATION and CENTAL BANK of the PHILIPPINES , respondents . paragraph paragraph paragraph

D E C I S I O N paragraph paragraph paragraph

TORRES , JR . , J . : paragraph paragraph paragraph

Assailed in this Petition for Review on Certiorari is the Decision of the respondent Court of Appeals dated January 29 , 1990 , [1] affirming the nullity of the transfer of Central Bank Certificate of Indebtedness ( CBCI ) No . D891 , [2] with a face value of P500 , 000 , from the Philippine Underwriters Finance Corporation ( Philfinance ) to the petitioner Trader ‘ s Royal Bank ( TRB ) , under a Repurchase Agreement[3] dated February 4 , 1981 , and a Detached Assignment[4] dated April

27 , 1981 .

Docketed as Civil Case No . 83 - 17966 in the Regional Trial Court of Manila , Branch 32 , the action was originally filed as a Petition for Mandamus[5] under Rule 65 of the Rules of Court , to compel the Central Bank of the Philippines to register the transfer of the subject CBCI to petitioner Traders Royal Bank ( TRB ) . paragraph paragraph paragraph

In the said petition , TRB stated

that :

“ 3 . On November 27 , 1979 , Filriters Guaranty Assurance

Corporation ( Filriters ) executed a ‘ Detached

Assignment ‘ xxx , whereby Filriters , as registered

owner , sold , transferred , assigned and delivered unto Philippine

Underwriters Finance Corporation ( Philfinance ) all its rights and title to

Central Bank Certificates of Indebtedness ( CBCI ) Nos . D890 to

D896 , inclusive , each in the denomination of PESOS : FIVE HUNDRED

THOUSAND ( P500 , 000 ) and having an aggregate value of

PESOS : THREE MILLION FIVE HUNDRED

THOUSAND ( P3 , 500 , 000 . 00 ) ;

4 . The aforesaid Detached Assignment ( Annex “ A “ ) contains an

express authorization executed by the transferor intended to complete the assignment

through the registration of the transfer in the name of PhilFinance , which

authorization is specifically phrased as follows : ‘ ( Filriters ) hereby

irrevocably authorized the said issuer ( Central Bank ) to transfer the said

bond / certificates on the books of its fiscal

agent ; paragraph paragraph paragraph

5 . On February 4 , 1981 , petitioner entered into a Repurchase Agreement

with PhilFinance xxx , whereby , for and in consideration of the sum of

PESOS : FIVE HUNDRED

THOUSAND ( P500 , 000 . 00 ) , PhilFinance sold , transferred and

delivered to petitioner CBCI 4 - year , 8th series , Serial No . D891 with a

face value of P500 , 000 . 00 xxx , which CBCI was among those previously

acquired by PhilFinance from Filriters as averred in paragraph 3 of the

Petition ; paragraph paragraph paragraph

6 . Pursuant to the aforesaid Repurchase

Agreement ( Annex ‘ B ‘ ) , Philfinance agreed to repurchase CBCI

Serial No . D891 ( Annex ‘ C ‘ ) , at the stipulated price of

PESOS : FIVE HUNDRED NINETEEN THOUSAND THREE HUNDRED

SIXTY - ONE & 11 / 100 ( P519 , 361 . 11 ) on April

27 , 1981 ; paragraph paragraph paragraph

7 . PhilFinance failed to repurchase the CBCI on the agreed date of

maturity , April 27 , 1981 , when the checks it issued in favor of petitioner

were dishonored for insufficient

funds ;

8 . Owing to the default of PhilFinance , it executed a Detached Assignment in

favor of the Petitioner to enable the latter to have its title completed and registered in

the books of the respondent . And by means of said Detachment

Assignment , Philfinance transferred and assigned all its rights and title in the said

CBCI ( Annex ‘ C ‘ ) to petitioner and , furthermore , it did

thereby ‘ irrevocably authorize the said issuer ( respondent herein ) to

transfer the said bond / certificate on the books of its fiscal agent . ‘ xxx

paragraph paragraph paragraph

9 . Petitioner presented the CBCI ( Annex ‘ C ‘ ) , together with the

two ( 2 ) aforementioned Detached

Assignments ( Annexes ‘ B ‘ and ‘ D ‘ ) , to the Securities

Servicing Department of the respondent , and requested the latter to effect the

transfer of the CBCI on its books and to issue a new certificate in the name of

petitioner as absolute owner thereof ; paragraph paragraph paragraph

10 . Respondent failed and refused to register the transfer as requested , and

continues to do so notwithstanding petitioner ‘ s valid and just title over the same

and despite repeated demands in writing , the latest of which is hereto attached as

Annex ‘ E ‘ and made an integral part

hereof ;

11 . The express provisions governing the transfer of the CBCI were substantially

complied with in petitioner ‘ s request for registration , to

wit : paragraph paragraph paragraph

‘ No transfer thereof shall be valid unless made at said office ( where the

Certificate has been registered ) by the registered owner hereof , in person or by

his attorney duly authorized in writing , and similarly noted hereon , and upon

payment of a nominal transfer fee which may be required , a new Certificate shall

be issued to the transferee of the registered holder

thereof . ‘ paragraph paragraph paragraph

and , without a doubt , the Detached Assignments presented to respondent were

sufficient authorizations in writing executed by the registered

owner , Filriters , and its transferee , PhilFinance , as required by the

above - quoted provision ;

12 . Upon such compliance with the aforesaid requirements , the ministerial

duties of registering a transfer of ownership over the CBCI and issuing a new

certificate to the transferee devolves upon the

respondent ; “ paragraph paragraph paragraph

Upon these assertions , TRB prayed for the registration by the Central Bank of the subject CBCI in its name . paragraph paragraph paragraph

On December 4 , 1984 , the Regional Trial Court trying the case took cognizance of the defendant Central Bank of the Philippines ‘ Motion for Admission of Amended Answer with Counter Claim for Interpleader , [6] thereby calling to fore the respondent Filriters Guaranty Assurance Corporation ( Filriters ) , the registered owner of the subject CBCI as respondent . paragraph paragraph paragraph

For its part , Filriters interjected as Special Defenses the following : paragraph paragraph paragraph

“ 11 . Respondent is the registered owner of CBCI

No . 891 ;

12 . The CBCI constitutes part of the reserve investment against liabilities required

of respondent as an insurance company under the Insurance

Code ; paragraph paragraph paragraph

13 . Without any consideration or benefit whatsoever to Filriters , in violation of

law and the trust fund doctrine and to the prejudice of policyholders and to all who

have present or future claim against policies issued by Filriters , Alfredo

Banaria , then Senior Vice - President - Treasury of Filriters , without any

board resolution , knowledge or consent of the board of directors of Filriters and

without any clearance or authorization from the Insurance

Commissioner , executed a detached assignment purportedly assigning CBCI

No . 891 to Philfinance ; paragraph paragraph paragraph

xxx

14 . Subsequently , Alberto Fabella , Senior Vice - President -

Comptroller and Pilar Jacobe , Vice - President - Treasury of

Filriters ( both of whom were holding the same positions in

Philfinance ) , without any consideration or benefit redounding to Filriters and

to the grave prejudice of Filriters , its policy holders and all who have present or

future claims against its policies , executed similar detached assignment forms

transferring the CBCI to plaintiff ; paragraph paragraph paragraph

xxx paragraph paragraph paragraph

15 . The detached assignment is patently void and inoperative because the

assignment is without the knowledge and consent of directors of Filriters , and not

duly authorized in writing by the Board , as required by Article V , Section 3 of

CB Circular No . 769 ; paragraph paragraph paragraph

16 . The assignment of the CBCI to Philfinance is a personal act of Alfredo

Banaria and not the corporate act of Filriters and as such null and

void ; paragraph paragraph paragraph

a ) The assignment was executed without consideration and for that reason , the

assignment is void from the beginning ( Article 1409 , Civil

Code ) ; paragraph paragraph paragraph

b ) The assignment was executed without any knowledge and consent of the board

of directors of Filriters ; paragraph paragraph paragraph

c ) The CBCI constitutes reserve investment of Filriters against

liabilities , which is a requirement under the Insurance Code for its existence as an

insurance company and the pursuit of its business operations . The assignment of

the CBCI is illegal act , in the sense of malum in se or malum prohibitum , for

anyone to make , either as corporate or personal

act ;

d ) The transfer or diminution of reserve investments of Filriters is expressly

prohibited by law , is immoral and against public

policy ; paragraph paragraph paragraph

e ) The assignment of the CBCI has resulted in the capital impairment and in the

solvency deficiency of Filriters ( and has in fact helped in placing Filriters under

conservatorship ) , an inevitable result known to the officer who executed the

detached assignment . paragraph paragraph paragraph

17 . Plaintiff had acted in bad faith and with knowledge of the illegality and

invalidity of the assignment ; paragraph paragraph paragraph

a ) The CBCI No . 891 is not a negotiable instrument and as a certificate of

indebtedness is not payable to bearer but is registered in the name of

Filriters ; paragraph paragraph paragraph

b ) The provision on transfer of the CBCIs , provides that the Central Bank shall

treat the registered owner as the absolute ownerand that the value of the registered

certificates shall be payable only to the registered owner ; a sufficient notice to

plaintiff that the assignments do not give them the registered owner ‘ s right as

absolute owner of the CBCIs ; paragraph paragraph paragraph

c ) CB Circular 769 , Series of 1980 ( Rules and Regulations Governing

CBCIs ) provides that registered certificates are payable only to the registered

owner ( Article II , Section 1 ) . paragraph paragraph paragraph

18 . Plaintiff knew full well that the assignment by Philfinance of CBCI

No . 891 by Filriters is not a regular transaction made in the usual or ordinary

course of business ; paragraph paragraph paragraph

a ) The CBCI constitutes part of the reserve investments of Filriters against

liabilities required by the Insurance Code and its assignment or transfer is expressly

prohibited by law . There was no attempt to get any clearance or authorization

from the Insurance Commissioner ;

b ) The assignment by Filriters of the CBCI is clearly not a transaction in the usual

or regular course of its business ; paragraph paragraph paragraph

c ) The CBCI involved substantial amount and its assignment clearly constitutes

disposition of ‘ all or substantially all ‘ of the assets of Filriters , which

requires the affirmative action of the stockholders ( Section

40 , Corporation [ sic ] Code ) . [7] paragraph paragraph paragraph

In its Decision[8] dated April 29 , 1988 , the Regional Trial Court of Manila , Branch XXXII found the assignment of CBCI No . D891 in favor of Philfinance , and the subsequent assignment of the same CBCI by Philfinance in favor of Traders Royal Bank null and void and of no force and effect . The dispositive portion of the decision reads : paragraph paragraph paragraph

“ ACCORDINGLY , judgment is hereby rendered in favor of the respondent

Filriters Guaranty Assurance Corporation and against the plaintiff Traders Royal

Bank : paragraph paragraph paragraph

( a ) Declaring the assignment of CBCI No . 891 in favor of

PhilFinance , and the subsequent assignment of CBCI by PhilFinance in favor of

the plaintiff Traders Royal Bank as null and void and of no force and

effect ; paragraph paragraph paragraph

( b ) Ordering the respondent Central Bank of the Philippines to disregard the

said assignment and to pay the value of the proceeds of the CBCI No . D891 to the

Filtriters Guaranty Assurance Corporation ; paragraph paragraph paragraph

( c ) Ordering the plaintiff Traders Royal Bank to pay respondent Filriters

Guaranty Assurance Corp . The sum of P10 , 000 as attorney ‘ s

fees ; and

( d ) to pay the costs . paragraph paragraph paragraph

SO ORDERED . “ [9] paragraph paragraph paragraph

The petitioner assailed the decision of the trial court in the Court of Appeals , [10] but their appeal likewise failed . The findings of fact of the said court are hereby reproduced : paragraph paragraph paragraph

“ The records reveal that defendant Filriters is the registered owner of CBCI

No . D891 . Under a deed of assignment dated November

27 , 1971 , Filriters transferred CBCI No . D891 to Philippine Underwriters

Finance Corporation ( Philfinance ) . Subsequently , Philfinance

transferred CBCI No . D891 , which was still registered in the name of

Filriters , to appellant Traders Royal Bank ( TRB ) . The transfer was

made under a repurchase agreement dated February 4 , 1981 , granting

Philfinance the right to repurchase the instrument on or before April

27 , 1981 . When Philfinance failed to buy back the note on maturity date , it

executed a deed of assignment , dated April 27 , 1981 , conveying to

appellant TRB all its rights and title to CBCI

No . D891 . paragraph paragraph paragraph

Armed with the deed of assignment , TRB then sought the transfer and registration

of CBCI No . D891 in its name before the Security and Servicing Department of

the Central Bank ( CB ) . Central Bank , however , refused to effect

the transfer and registration in view of an adverse claim filed by defendant

Filriters . paragraph paragraph paragraph

Left with no other recourse , TRB filed a special civil action for mandamus against

the Central Bank in the Regional Trial Court of Manila . The

suit , however , was subsequently treated by the lower court as a case of

interpleader when CB prayed in its amended answer that Filriters be impleaded as a

respondent and the court adjudge which of them is entitled to the ownership of CBCI

No . D891 . Failing to get a favorable judgment . TRB now comes to this

Court on appeal . “ [11] paragraph paragraph paragraph

In the appellate court , petitioner argued that the subject CBCI was a negotiable instrument , and having acquired the said certificate from Philfinance as a holder in due course , its possession of the same is thus free from any defect of title of prior parties and from any defense available to prior parties among themselves , and it may thus , enforce payment of the instrument for the full amount thereof against all parties liable thereon . [12] paragraph paragraph paragraph

In ignoring said argument , the appellate court said that the CBCI is not a negotiable instrument , since the instrument clearly stated that it was payable to Filriters , the registered owner , whose name was inscribed thereon , and that the certificate lacked the words of negotiability which serve as an expression of consent that the instrument may be transferred by negotiation .

Obviously , the assignment of the certificate from Filriters to Philfinance was fictitious , having been made without consideration , and did not conform to Central Bank Circular No . 769 , series of 1980 , better known as

the “ Rules and Regulations Governing Central Bank Certificates of Indebtedness “ , which provided that any “ assignment of registered certificates shall not be valid unless made xxx by the registered owner thereof in person or by his representative duly authorized in writing . “

Petitioner ‘ s claimed interest has no basis , since it was derived from Philfinance , whose interest was inexistent , having acquired the certificate through simulation . What happened was Philfinance merely borrowed CBCI No . D891 from Filriters , a sister corporation , to guarantee its financing operations . paragraph paragraph paragraph

Said the Court : paragraph paragraph paragraph

“ In the case at bar , Alfredo O . Banaria , who signed the deed of

assignment purportedly for and on behalf of Filriters , did not have the necessary

written authorization from the Board of Directors of Filriters to act for the

latter . For lack of such authority , the assignment did not therefore bind

Filriters and violated at the same time Central Bank Circular No . 769 which has

the force and effect of a law , resulting in the nullity of the

transfer ( People v . Que Po Lay , 94 Phil 640 ; 3M

Philippines , Inc . vs . Commissioner of Internal Revenue , 165 SCRA

778 ) . paragraph paragraph paragraph

In sum , Philfinance acquired no title or rights under CBCI No . D891 which it

could assign or transfer to Traders Royal Bank and which the latter can register with

the Central Bank . paragraph paragraph paragraph

WHEREFORE , the judgment appealed from is AFFIRMED , with costs

against plaintiff - appellant . paragraph paragraph paragraph

SO ORDERED . “ [13] paragraph paragraph paragraph

Petitioner ‘ s present position rests solely on the argument that Philfinance owns 90% of Filriter ‘ s equity and the two corporations have identical corporate officers , thus demanding the application of the doctrine of piercing the veil of corporate fiction , as to give validity to the transfer of the CBCI from the registered owner to petitioner TRB . [14] This renders the payment by TRB to Philfinance for CBCI , as actual payment to Filriters . Thus , there is no merit to the lower courts ‘ ruling that the transfer of the CBCI from Filriters to Philfinance was null and void for lack of consideration . paragraph paragraph paragraph

Admittedly , the subject CBCI is not a negotiable instrument in the absence of words of negotiability within the meaning of the negotiable instruments law ( Act 2031 ) . paragraph paragraph paragraph

The pertinent portions of the subject CBCI read : paragraph paragraph paragraph

xxx paragraph paragraph paragraph

The Central Bank of the Philippines ( the Bank ) for value received , hereby

promises to pay to bearer , or if this Certificate of indebtedness be registered , to

FILRITERS GUARANTY ASSURANCE CORPORATION , the registered owner

hereof , the principal sum of FIVE HUNDRED THOUSAND

PESOS . paragraph paragraph paragraph

xxx paragraph paragraph paragraph

Properly understood , a certificate of indebtedness pertains to certificates for the creation and maintenance of a permanent improvement revolving fund , is similar to a “ bond , “ ( 82 Minn . 202 ) . Being equivalent to a bond , it is properly understood as an acknowledgment of an obligation to pay a fixed sum of money . It is usually used for the purpose of long term loans . paragraph paragraph paragraph

The appellate court ruled that the subject CBCI is not a negotiable

instrument , stating that :

“ As worded , the instrument provides a promise ‘ to pay Filriters Guaranty

Assurance Corporation , the registered owner hereof . ‘ Very clearly , the

instrument is payable only to Filriters , the registered owner , whose name is

inscribed thereon . It lacks the words of negotiability which should have served as

an expression of consent that the instrument may be transferred by

negotiation . [15] paragraph paragraph paragraph

A reading of the subject CBCI indicates that the same is payable to FILRITERS GUARANTY ASSURANCE CORPORATION , and to no one else , thus , discounting the petitioner ‘ s submission that the same is a negotiable instrument , and that it is a holder in due course of the certificate . paragraph paragraph paragraph

The language of negotiability which characterize a negotiable paper as a credit instrument is its freedom to circulate as a substitute for money . Hence , freedom of negotiability is the touchstone relating to the protection of holders in due course , and the freedom of negotiability is the foundation for the protection which the law throws around a holder in due course ( 11 Am . Jur . 2d , 32 ) . This freedom in negotiability is totally absent in a certificate of indebtedness as it merely acknowledges to pay a sum of money to a specified person or entity for a period of time . paragraph paragraph paragraph

As held in Caltex ( Philippines ) , Inc . vs . Court of Appeals : [16] paragraph paragraph paragraph

“ The accepted rule is that the negotiability or non - negotiability of an

instrument is determined from the writing , that is , from the face of the

instrument itself . In the construction of a bill or note , the intention of the

parties is to control , if it can be legally ascertained . While the writing may be

read in the light of surrounding circumstances in order to more perfectly understand

the intent and meaning of the parties , yet as they have constituted the writing to be

the only outward and visible expression of their meaning , no other words are to be

added to it or substituted in its stead . The duty of the court in such case is to

ascertain , not what the parties may have secretly intended as contradistinguished

from what their words express , but what is the meaning of the words they have

used . What the parties meant must be determined by what they

said . “ paragraph paragraph paragraph

Thus , the transfer of the instrument from Philfinance to TRB was merely an assignment , and is not governed by the negotiable instruments law . The pertinent question then is , was the transfer of the CBCI from Filriters to Philfinance and subsequently from Philfinance to TRB , in accord with existing law , so as to entitle TRB to have the CBCI registered in its name with the Central Bank ? paragraph paragraph paragraph

The following are the appellate court ‘ s pronouncements on the

matter :

“ Clearly shown in the record is the fact that Philfinance ‘ s title over

CBCI No . D891 is defective since it acquired the instrument from

Filriters fictitiously . Although the deed of assignment stated that the

transfer was for ‘ value received ‘ , there was really no

consideration involved . What happened was Philfinance merely

borrowed CBCI No . D891 from Filriters , a sister

corporation . Thus , for lack of any consideration , the assignment

made is a complete nullity . paragraph paragraph paragraph

What is more , We find that the transfer made by Filriters to Philfinance

did not conform to Central Bank Circular No . 769 , series of

1980 , otherwise known as the ‘ Rules and Regulations Governing

Central Bank Certificates of Indebtedness ‘ , under which the note was

issued . Published in the Official Gazette on November

19 , 1980 , Section 3 thereof provides that ‘ any assignment of

registered certificates shall not be valid unless made xxx by the registered

owner thereof in person or by his representative duly authorized in

writing . ‘ paragraph paragraph paragraph

In the case at bar , Alfredo O . Banaria , who signed the deed of

assignment purportedly for and on behalf of Filriters , did not have the

necessary written authorization from the Board of Directors of Filriters to act

for the latter . For lack of such authority , the assignment did not

therefore bind Filriters and violated at the same time Central Bank Circular

No . 769 which has the force and effect of a law , resulting in the

nullity of the transfer ( People vs . Que Po Lay , 94 Phil

640 ; 3M Philippines , Inc . vs . Commissioner of Internal

Revenue , 165 SCRA 778 ) . paragraph paragraph paragraph

In sum , Philfinance acquired no title or rights under CBCI No . D891

which it could assign or transfer to Traders Royal Bank and which the latter

can register with the Central Bank . “ paragraph paragraph paragraph

Petitioner now argues that the transfer of the subject CBCI to TRB must be upheld , as the respondent Filriters and Philfinance , though separate corporate entities on paper , have used their corporate fiction to defraud TRB into purchasing the subject CBCI , which purchase now is refused registration by the Central Bank . paragraph paragraph paragraph

Says the petitioner ; paragraph paragraph paragraph

“ Since Philfinance owns about 90% of Filriters and the two companies have the

same corporate officers , if the principle of piercing the veil of corporate entity

were to be applied in this case , then TRB ‘ s payment to Philfinance for the

CBCI purchased by it could just as well be considered a payment to Filriters , the

registered owner of the CBCI as to bar the latter from claiming , as it has , that it

never received any payment for that CBCI sold and that said CBCI was sold without

its authority . paragraph paragraph paragraph

x x x paragraph paragraph paragraph

We respectfully submit that , considering that the Court of Appeals has held that

the CBCI21 was merely borrowed by Philfinance from Filriters , a sister

corporation , to guarantee its ( Philfinance ‘ s ) financing operations , if

it were to be consistent therewith , on the issue raised by TRB that there was a

piercing a veil of corporate entity , the Court of Appeals should have ruled that

such veil of corporate entity was , in fact , pierced , and the payment by TRB

to Philfinance should be construed as payment to

Filriters . “ [17] paragraph paragraph paragraph

We disagree with the Petitioner . paragraph paragraph paragraph

Petitioner cannot put up the excuse of piercing the veil of corporate entity , as this is merely an equitable remedy , and may be awarded only in cases when the corporate fiction is used to defeat public convenience , justify wrong , protect fraud

or defend crime or where a corporation is a mere alter ego or business conduit of a person . [18] paragraph paragraph paragraph

Piercing the veil of corporate entity requires the court to see through the protective shroud which exempts its stockholders from liabilities that ordinarily , they could be subject to , or distinguishes one corporation from a seemingly separate one , were it not for the existing corporate fiction . But to do this , the court must be sure that the corporate fiction was misused , to such an extent that injustice , fraud , or crime was committed upon another , disregarding , thus , his , her , or its rights . It is the protection of the interests of innocent third persons dealing with the corporate entity which the law aims to protect by this doctrine . paragraph paragraph paragraph

The corporate separateness between Filriters and Philfinance remains , despite the petitioners insistence on the contrary . For one , other than the allegation that Filriters is 90% owned by Philfinance , and the identity of one shall be maintained as to the other , there is nothing else which could lead the court under the circumstances to disregard their corporate

personalities .

Though it is true that when valid reasons exist , the legal fiction that a corporation is an entity with a juridical personality separate from its stockholders and from other corporations may be disregarded , [19] in the absence of such grounds , the general rule must be upheld . The fact that Philfinance owns majority shares in Filriters is not by itself a ground to disregard the independent corporate status of Filriters . In Liddel & Co . , Inc . vs . Collector of Internal Revenue , [20] the mere ownership by a single stockholder or by another corporation of all or nearly all of the capital stock of a corporation is not of itself a sufficient reason for disregarding the fiction of separate corporate personalities . paragraph paragraph paragraph

In the case at bar , there is sufficient showing that the petitioner was not defrauded at all when it acquired the subject certificate of indebtedness from Philfinance . paragraph paragraph paragraph

On its face , the subject certificates states that it is registered in the name of Filriters . This should have put the petitioner on notice , and prompted it to inquire from Filriters as to Philfinance ‘ s title over the same or its authority to assign the certificate . As it is , there is no showing to the effect that petitioner had any dealings whatsoever with Filriters , nor did it make inquiries as to the ownership of the certificate . paragraph paragraph paragraph

The terms of the CBCI No . D891 contain a provision on its

TRANSFER . Thus :

“ TRANSFER : This Certificate shall pass by delivery unless it is registered in

the owner ‘ s name at any office of the Bank or any agency duly authorized by the

Bank , and such registration is noted hereon . After such registration no transfer

thereof shall be valid unless made at said office ( where the Certificate has been

registered ) by the registered owner hereof , in person , or by his

attorney , duly authorized in writing and similarly noted hereon and upon payment

of a nominal transfer fee which may be required , a new Certificate shall be issued

to the transferee of the registered owner thereof . The bank or any agency duly

authorized by the Bank may deem and treat the bearer of this Certificate , or if this

Certificate is registered as herein authorized , the person in whose name the same is

registered as the absolute owner of this Certificate , for the purpose of receiving

payment hereof , or on account hereof , and for all other purpose whether or not

this Certificate shall be overdue . “ paragraph paragraph paragraph

This is notice to petitioner to secure from Filriters a written authorization for the transfer or to require Philfinance to submit such an authorization from Filriters . paragraph paragraph paragraph

Petitioner knew that Philfinance is not the registered owner of CBCI No . D891 . The fact that a non - owner was disposing of the registered CBCI owned by another entity was a good reason for petitioner to verify or inquire as to the title of Philfinance to dispose of the CBCI . paragraph paragraph paragraph

Moreover , CBCI No . D891 is governed by CB Circular No . 769 , series of 1980 , [21] known as the Rules and Regulations Governing Central Bank Certificates of Indebtedness , Section 3 , Article V of which provides that : paragraph paragraph paragraph

“ SECTION 3 . Assignment of Registered Certificates . - Assignment of

registered certificates shall not be valid unless made at the office where the same have

been issued and registered or at the Securities Servicing Department , Central Bank

of the Philippines , and by the registered owner thereof , in person or by his

representative , duly authorized in writing . For this purpose , the transferee

may be designated as the representative of the registered

owner . “ paragraph paragraph paragraph

Petitioner , being a commercial bank , cannot feign ignorance of Central Bank Circular 769 , and its requirements . An entity which deals with corporate agents within circumstances showing that the agents are acting in excess of corporate authority , may not hold the corporation liable . [22] This is only fair , as everyone must , in the exercise of his rights and in the performance of his duties , act with justice , give everyone his due , and observe honesty and good faith . [23] paragraph paragraph paragraph

The transfer made by Filriters to Philfinance did not conform to the said Central Bank Circular , which for all intents , is considered part of the law . As found by the courts a quo , Alfredo O . Banaria , who had signed the deed of assignment from Filriters to Philfinance , purportedly for and in favor of Filriters , did not have the necessary written authorization from the Board of Directors of Filriters to act for the latter . As it is , the sale from Filriters to Philfinance was

fictitious , and therefore void and inexistent , as there was no consideration for the same . This is fatal to the petitioner ‘ s cause , for then , Philfinance had no title over the subject certificate to convey to Traders Royal Bank . Nemo potest nisi quod de jure potest - no man can do anything except what he can do lawfully . paragraph paragraph paragraph

Concededly , the subject CBCI was acquired by Filriters to form part of its legal and capital reserves , which are required by law[24] to be maintained at a mandated level . This was pointed out by Elias Garcia , Manager - in - Charge of respondent Filriters , in his testimony given before the court on May 30 , 1986 . paragraph paragraph paragraph

“ Q Do you know this Central Bank Certificate of Indebtedness , in short , CBCI No . D891 in the face value of P500 , 000 . 00 subject of this case ? paragraph paragraph paragraph

A Yes , sir . paragraph paragraph paragraph

Q Why do you know this ? paragraph paragraph paragraph

A Well , this was the CBCI of the company sought to be examined by the Insurance Commission sometime in early 1981 and this CBCI No . 891 was among the CBCI ‘ s that were found to be missing . paragraph paragraph paragraph

Q Let me take you back further before 1981 . Did you have the knowledge of this CBCI No . 891 before 1981 ? paragraph paragraph paragraph

A Yes , sir . This CBCI is an investment of Filriters required by the Insurance Commission as legal reserve of the

company .

Q Legal reserve for the purpose of what ? paragraph paragraph paragraph

A Well , you see , the Insurance companies are required to put up legal reserves under Section 213 of the Insurance Code equivalent to 40 percent of the premiums receipt and further , the Insurance Commission requires this reserve to be invested preferably in government securities or government bonds . This is how this CBCI came to be purchased by the company . “ paragraph paragraph paragraph

It cannot , therefore , be taken out of the said fund , without violating the requirements of the law . Thus , the unauthorized use or distribution of the same by a corporate officer of Filriters cannot bind the said corporation , not without the approval of its Board of Directors , and the maintenance of the required reserve fund . paragraph paragraph paragraph

Consequently , the title of Filriters over the subject certificate of indebtedness must be upheld over the claimed interest of Traders Royal Bank . paragraph paragraph paragraph

ACCORDINGLY , the petition is DISMISSED and the decision appealed from dated January 29 , 1990 is hereby AFFIRMED . paragraph paragraph paragraph

SO ORDERED . paragraph paragraph paragraph

Regalado , ( Chairman ) , Romero , Puno , and Mendoza , JJ . , concur . paragraph paragraph paragraph

paragraph paragraph paragraph

[1] Justice Ricardo L . Pronove , Jr . , ponente ; concurred in by Justices Alfredo L . Benipayo

and Serafin V . C . Guingona , p . 18 , Rollo .

[2] p . 143 , Record

[3] Ibid . , at p . 146 .

[4] Ibid . , at p . 148 .

[5] p . 1 , Record .

[6] p . 75 , Record .

[7] Answer , p . 97 , Record .

[8] p . 315 , Record .

[9] Pp . 16 - 17 , RTC Decision , p . 330 , Rollo .

[10] Annex “ A “ . Petition , supra .

[11] Court of Appeals Decision , pp . 18 - 19 , Rollo .

[12] Section 57 . Negotiable Instruments Law .

[13] Petition , Annex “ A “ , pp . 21 - 22 , Rollo .

[14] Ibid .

[15] Campos and Campos , Negotiable Instruments Law , p . 38 , 1971 ed .

[16] G . R . No . 97753 , August 10 , 1992 , 212 SCRA 448 .

[17] Petition .

[18] Yu vs . National Labor Relations Commission 245 SCRA 134 .

[19] Guatson International Travel and Tours , Inc . vs . National Labor Relations Commission , 230 SCRA 815 .

[20] 2 SCRA 632 .

[21] 76 Official Gazette 9370 .

[22] See Article 1883 , Civil Code .

[23] See Article 19 , Civil Code .

[24] Section 213 . Every insurance company , other than life , shall maintain a reserve for unearned premiums on its policies in force , which shall be charged as a liability in any determination of its financial condition . Such reserve shall be equal to forty percentum of the gross premiums , less returns and cancellations , received on policies or risks having more than one year to run ; Provided that for marine cargo risks , the reserve shall be equal to forty per centum of the premiums written in the policies of risks , and the full amount of premiums written

during the last two months of the calendar year upon all other marine risks not terminated . Presidential Decree No . 612 ( The Insurance Code of the Philippines . )

Republic of the Philippines

Supreme Court Manila

THIRD DIVISION

PHILIPPINE NATIONAL BANK, G.R. No. 170325

Petitioner,

Present:

YNARES-SANTIAGO, J.,

Chairperson,

- versus - AUSTRIA-MARTINEZ,

CHICO-NAZARIO,

NACHURA, and

REYES, JJ.

ERLANDO T. RODRIGUEZ Promulgated:

and NORMA RODRIGUEZ,

Respondents. September 26, 2008

x - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - x

D E C I S I O N

REYES, R.T., J.:

WHEN the payee of the check is not intended to be the true recipient of its

proceeds, is it payable to order or bearer? What is the fictitious-payee rule and

who is liable under it? Is there any exception?

These questions seek answers in this petition for review on certiorari of the

Amended Decision[1]

of the Court of Appeals (CA) which affirmed with

modification that of the Regional Trial Court (RTC).[2]

The Facts

The facts as borne by the records are as follows:

Respondents-Spouses Erlando and Norma Rodriguez were clients of

petitioner Philippine National Bank (PNB), Amelia Avenue

Branch, Cebu City. They maintained savings and demand/checking accounts,

namely, PNBig Demand Deposits (Checking/Current Account No. 810624-6 under

the account name Erlando and/or Norma Rodriguez), and PNBig Demand Deposit

(Checking/Current Account No. 810480-4 under the account name Erlando T.

Rodriguez).

The spouses were engaged in the informal lending business. In line with

their business, they had a discounting[3]

arrangement with the Philnabank

Employees Savings and Loan Association (PEMSLA), an association

of PNBemployees. Naturally, PEMSLA was likewise a client of PNB Amelia

Avenue Branch. The association maintained current and savings accounts with

petitioner bank.

PEMSLA regularly granted loans to its members. Spouses Rodriguez would

rediscount the postdated checks issued to members whenever the association was

short of funds. As was customary, the spouses would replace the postdated checks

with their own checks issued in the name of the members.

It was PEMSLA’s policy not to approve applications for loans of members

with outstanding debts. To subvert this policy, some PEMSLA officers devised a

scheme to obtain additional loans despite their outstanding loan accounts. They

took out loans in the names of unknowing members, without the knowledge or

consent of the latter. The PEMSLA checks issued for these loans were then given

to the spouses for rediscounting. The officers carried this out by forging the

indorsement of the named payees in the checks.

In return, the spouses issued their personal checks (Rodriguez checks) in the

name of the members and delivered the checks to an officer of PEMSLA. The

PEMSLA checks, on the other hand, were deposited by the spouses to their

account.

Meanwhile, the Rodriguez checks were deposited directly by PEMSLA to its

savings account without any indorsement from the named payees. This was an

irregular procedure made possible through the facilitation of Edmundo Palermo,

Jr., treasurer of PEMSLA and bank teller in the PNB Branch. It appears that this

became the usual practice for the parties.

For the period November 1998 to February 1999, the spouses issued sixty

nine (69) checks, in the total amount of P2,345,804.00. These were payable to

forty seven (47) individual payees who were all members of PEMSLA.[4]

Petitioner PNB eventually found out about these fraudulent acts. To put a

stop to this scheme, PNB closed the current account of PEMSLA. As a result, the

PEMSLA checks deposited by the spouses were returned or dishonored for the

reason “Account Closed.” The corresponding Rodriguez checks, however, were

deposited as usual to the PEMSLA savings account. The amounts were duly

debited from the Rodriguez account. Thus, because the PEMSLA checks given as

payment were returned, spouses Rodriguez incurred losses from the rediscounting

transactions.

RTC Disposition

Alarmed over the unexpected turn of events, the spouses Rodriguez filed a

civil complaint for damages against PEMSLA, the Multi-Purpose Cooperative of

Philnabankers (MCP), and petitioner PNB. They sought to recover the value of

their checks that were deposited to the PEMSLA savings account amounting

to P2,345,804.00. The spouses contended that because PNB credited the checks

to the PEMSLA account even without indorsements, PNBviolated its

contractual obligation to them as depositors. PNB paid the wrong payees, hence, it

should bear the loss.

PNB moved to dismiss the complaint on the ground of lack of cause of

action. PNB argued that the claim for damages should come from the payees of

the checks, and not from spouses Rodriguez. Since there was no demand from the

said payees, the obligation should be considered as discharged.

In an Order dated January 12, 2000, the RTC denied PNB’s motion to

dismiss.

In its Answer,[5]

PNB claimed it is not liable for the checks which it paid to

the PEMSLA account without any indorsement from the payees. The bank

contended that spouses Rodriguez, the makers, actually did not intend for the

named payees to receive the proceeds of the checks. Consequently, the payees

were considered as “fictitious payees” as defined under the Negotiable

Instruments Law (NIL). Being checks made to fictitious payees which are bearer

instruments, the checks were negotiable by mere delivery. PNB’s Answer

included its cross-claim against its co-defendants PEMSLA and the MCP, praying

that in the event that judgment is rendered against the bank, the cross-defendants

should be ordered to reimburse PNB the amount it shall pay.

After trial, the RTC rendered judgment in favor of spouses Rodriguez

(plaintiffs). It ruled that PNB (defendant) is liable to return the value of the

checks. All counterclaims and cross-claims were dismissed. The dispositive

portion of the RTC decision reads:

WHEREFORE, in view of the foregoing, the Court hereby renders

judgment, as follows:

1. Defendant is hereby ordered to pay the plaintiffs the total amount

of P2,345,804.00 or reinstate or restore the amount of P775,337.00 in the

PNBig Demand Deposit Checking/Current Account No. 810480-4 of

Erlando T. Rodriguez, and the amount of P1,570,467.00 in the PNBig

Demand Deposit, Checking/Current Account No. 810624-6 of Erlando T.

Rodriguez and/or Norma Rodriguez, plus legal rate of interest thereon to

be computed from the filing of this complaint until fully paid;

2. The defendant PNB is hereby ordered to pay the plaintiffs the following

reasonable amount of damages suffered by them taking into consideration

the standing of the plaintiffs being sugarcane planters, realtors, residential

subdivision owners, and other businesses:

(a) Consequential damages, unearned income in the amount

of P4,000,000.00, as a result of their having incurred great

dificulty (sic) especially in the residential subdivision

business, which was not pushed through and the contractor

even threatened to file a case against the plaintiffs;

(b) Moral damages in the amount of P1,000,000.00;

(c) Exemplary damages in the amount of P500,000.00;

(d) Attorney’s fees in the amount of P150,000.00 considering that

this case does not involve very complicated issues; and for the

(e) Costs of suit.

3. Other claims and counterclaims are hereby dismissed.[6]

CA Disposition

PNB appealed the decision of the trial court to the CA on the principal

ground that the disputed checks should be considered as payable to bearer and not

to order.

In a Decision[7]

dated July 22, 2004, the CA reversed and set aside

the RTC disposition. The CA concluded that the checks were obviously meant by

the spouses to be really paid to PEMSLA. The court a quo declared:

We are not swayed by the contention of the plaintiffs-appellees (Spouses

Rodriguez) that their cause of action arose from the alleged breach of contract by

the defendant-appellant (PNB) when it paid the value of the checks to PEMSLA

despite the checks being payable to order. Rather, we are more convinced by the

strong and credible evidence for the defendant-appellant with regard to the

plaintiffs-appellees’ and PEMSLA’s business arrangement – that the value of the

rediscounted checks of the plaintiffs-appellees would be deposited in PEMSLA’s

account for payment of the loans it has approved in exchange for PEMSLA’s

checks with the full value of the said loans. This is the only obvious explanation

as to why all the disputed sixty-nine (69) checks were in the possession of

PEMSLA’s errand boy for presentment to the defendant-appellant that led to this

present controversy. It also appears that the teller who accepted the said checks

was PEMSLA’s officer, and that such was a regular practice by the parties until

the defendant-appellant discovered the scam. The logical conclusion, therefore, is

that the checks were never meant to be paid to order, but instead, to

PEMSLA. We thus find no breach of contract on the part of the defendant-

appellant.

According to plaintiff-appellee Erlando Rodriguez’ testimony, PEMSLA

allegedly issued post-dated checks to its qualified members who had applied for

loans. However, because of PEMSLA’s insufficiency of funds, PEMSLA

approached the plaintiffs-appellees for the latter to issue rediscounted checks in

favor of said applicant members. Based on the investigation of the defendant-

appellant, meanwhile, this arrangement allowed the plaintiffs-appellees to make a

profit by issuing rediscounted checks, while the officers of PEMSLA and other

members would be able to claim their loans, despite the fact that they were

disqualified for one reason or another. They were able to achieve this conspiracy

by using other members who had loaned lesser amounts of money or had not

applied at all. x x x.[8]

(Emphasis added)

The CA found that the checks were bearer instruments, thus they do not

require indorsement for negotiation; and that spouses Rodriguez and PEMSLA

conspired with each other to accomplish this money-making scheme. The payees

in the checks were “fictitious payees” because they were not the intended payees at

all.

The spouses Rodriguez moved for reconsideration. They argued, inter alia,

that the checks on their faces were unquestionably payable to order; and

that PNB committed a breach of contract when it paid the value of the checks to

PEMSLA without indorsement from the payees. They also argued that their cause

of action is not only against PEMSLA but also against PNB to recover the value of

the checks.

On October 11, 2005, the CA reversed itself via an Amended Decision, the

last paragraph and fallo of which read:

In sum, we rule that the defendant-appellant PNB is liable to the plaintiffs-

appellees Sps. Rodriguez for the following:

1. Actual damages in the amount of P2,345,804 with interest at

6% per annum from 14 May 1999 until fully paid;

2. Moral damages in the amount of P200,000;

3. Attorney’s fees in the amount of P100,000; and

4. Costs of suit.

WHEREFORE, in view of the foregoing premises, judgment is hereby

rendered by Us AFFIRMING WITH MODIFICATION the assailed decision

rendered in Civil Case No. 99-10892, as set forth in the immediately next

preceding paragraph hereof, and SETTING ASIDE Our original decision

promulgated in this case on 22 July 2004.

SO ORDERED.[9]

The CA ruled that the checks were payable to order. According to the

appellate court, PNB failed to present sufficient proof to defeat the claim of the

spouses Rodriguez that they really intended the checks to be received by the

specified payees. Thus, PNB is liable for the value of the checks which it paid to

PEMSLA without indorsements from the named payees. The award for damages

was deemed appropriate in view of the failure of PNB to treat the Rodriguez

account with the highest degree of care considering the fiduciary nature of

their relationship, which constrained respondents to seek legal action.

Hence, the present recourse under Rule 45.

Issues

The issues may be compressed to whether the subject checks are payable to

order or to bearer and who bears the loss?

PNB argues anew that when the spouses Rodriguez issued the disputed

checks, they did not intend for the named payees to receive the proceeds. Thus,

they are bearer instruments that could be validly negotiated by mere

delivery. Further, testimonial and documentary evidence presented during trial

amply proved that spouses Rodriguez and the officers of PEMSLA conspired with

each other to defraud the bank.

Our Ruling

Prefatorily, amendment of decisions is more acceptable than an erroneous

judgment attaining finality to the prejudice of innocent parties. A court

discovering an erroneous judgment before it becomes final may, motu proprioor

upon motion of the parties, correct its judgment with the singular objective of

achieving justice for the litigants.[10]

However, a word of caution to lower courts, the CA in Cebu in this

particular case, is in order. The Court does not sanction careless disposition of

cases by courts of justice. The highest degree of diligence must go into the study

of every controversy submitted for decision by litigants. Every issue and factual

detail must be closely scrutinized and analyzed, and all the applicable laws

judiciously studied, before the promulgation of every judgment by the court. Only

in this manner will errors in judgments be avoided.

Now to the core of the petition.

As a rule, when the payee is fictitious or not intended to be the true

recipient of the proceeds, the check is considered as a bearer instrument. A

check is “a bill of exchange drawn on a bank payable on demand.”[11]

It is either

an order or a bearer instrument. Sections 8 and 9 of the NIL states:

SEC. 8. When payable to order. – The instrument is payable to order

where it is drawn payable to the order of a specified person or to him or his

order. It may be drawn payable to the order of –

(a) A payee who is not maker, drawer, or drawee; or

(b) The drawer or maker; or

(c) The drawee; or

(d) Two or more payees jointly; or

(e) One or some of several payees; or

(f) The holder of an office for the time being.

Where the instrument is payable to order, the payee must be named or

otherwise indicated therein with reasonable certainty.

SEC. 9. When payable to bearer. – The instrument is payable to bearer –

(a) When it is expressed to be so payable; or

(b) When it is payable to a person named therein or bearer; or

(c) When it is payable to the order of a fictitious or non-existing person,

and such fact is known to the person making it so payable; or

(d) When the name of the payee does not purport to be the name of any

person; or

(e) Where the only or last indorsement is an indorsement in

blank.[12]

(Underscoring supplied)

The distinction between bearer and order instruments lies in their manner of

negotiation. Under Section 30 of the NIL, an order instrument requires an

indorsement from the payee or holder before it may be validly negotiated. A

bearer instrument, on the other hand, does not require an indorsement to be validly

negotiated. It is negotiable by mere delivery. The provision reads:

SEC. 30. What constitutes negotiation. – An instrument is negotiated

when it is transferred from one person to another in such manner as to constitute

the transferee the holder thereof. If payable to bearer, it is negotiated by delivery;

if payable to order, it is negotiated by the indorsement of the holder completed by

delivery.

A check that is payable to a specified payee is an order

instrument. However, under Section 9(c) of the NIL, a check payable to a

specified payee may nevertheless be considered as a bearer instrument if it is

payable to the order of a fictitious or non-existing person, and such fact is known

to the person making it so payable. Thus, checks issued to “Prinsipe Abante” or

“Si Malakas at si Maganda,” who are well-known characters in Philippine

mythology, are bearer instruments because the named payees are fictitious and

non-existent.

We have yet to discuss a broader meaning of the term “fictitious” as used in

the NIL. It is for this reason that We look elsewhere for guidance. Court rulings in

the United States are a logical starting point since our law on negotiable

instruments was directly lifted from the Uniform Negotiable Instruments Law of

the United States.[13]

A review of US jurisprudence yields that an actual, existing, and living

payee may also be “fictitious” if the maker of the check did not intend for the

payee to in fact receive the proceeds of the check. This usually occurs when the

maker places a name of an existing payee on the check for convenience or to cover

up an illegal activity.[14]

Thus, a check made expressly payable to a non-fictitious

and existing person is not necessarily an order instrument. If the payee is not the

intended recipient of the proceeds of the check, the payee is considered a

“fictitious” payee and the check is a bearer instrument.

In a fictitious-payee situation, the drawee bank is absolved from liability

and the drawer bears the loss. When faced with a check payable to a fictitious

payee, it is treated as a bearer instrument that can be negotiated by delivery. The

underlying theory is that one cannot expect a fictitious payee to negotiate the check

by placing his indorsement thereon. And since the maker knew this limitation, he

must have intended for the instrument to be negotiated by mere delivery. Thus, in

case of controversy, the drawer of the check will bear the loss. This rule is

justified for otherwise, it will be most convenient for the maker who desires to

escape payment of the check to always deny the validity of the indorsement. This

despite the fact that the fictitious payee was purposely named without any intention

that the payee should receive the proceeds of the check.[15]

The fictitious-payee rule is best illustrated in Mueller & Martin v. Liberty

Insurance Bank.[16]

In the said case, the corporation Mueller & Martin was

defrauded by George L. Martin, one of its authorized signatories. Martin drew

seven checks payable to the German Savings Fund Company Building Association

(GSFCBA) amounting to $2,972.50 against the account of the corporation without

authority from the latter. Martin was also an officer of the GSFCBA but did not

have signing authority. At the back of the checks, Martin placed the rubber stamp

of the GSFCBA and signed his own name as indorsement. He then successfully

drew the funds from Liberty Insurance Bank for his own personal profit. When the

corporation filed an action against the bank to recover the amount of the checks,

the claim was denied.

The US Supreme Court held in Mueller that when the person making the

check so payable did not intend for the specified payee to have any part in the

transactions, the payee is considered as a fictitious payee. The check is then

considered as a bearer instrument to be validly negotiated by mere delivery. Thus,

the US Supreme Court held that Liberty Insurance Bank, as drawee, was

authorized to make payment to the bearer of the check, regardless of whether prior

indorsements were genuine or not.[17]

The more recent Getty Petroleum Corp. v. American Express Travel Related

Services Company, Inc.[18]

upheld the fictitious-payee rule. The rule protects the

depositary bank and assigns the loss to the drawer of the check who was in a better

position to prevent the loss in the first place. Due care is not even required from

the drawee or depositary bank in accepting and paying the checks. The effect is

that a showing of negligence on the part of the depositary bank will not defeat the

protection that is derived from this rule.

However, there is a commercial bad faith exception to the fictitious-

payee rule. A showing of commercialbad faith on the part of the drawee bank,

or any transferee of the check for that matter, will work to strip it of this

defense. The exception will cause it to bear the loss. Commercial bad faith is

present if the transferee of the check acts dishonestly, and is a party to the

fraudulent scheme. Said the US Supreme Court in Getty:

Consequently, a transferee’s lapse of wary vigilance, disregard of

suspicious circumstances which might have well induced a prudent banker to

investigate and other permutations of negligence are not relevant considerations

under Section 3-405 x x x. Rather, there is a “commercial bad faith” exception

to UCC 3-405, applicable when the transferee “acts dishonestly – where it has

actual knowledge of facts and circumstances that amount to bad faith, thus itself

becoming a participant in a fraudulent scheme. x x x Such a test finds support in

the text of the Code, which omits a standard of care requirement from UCC 3-405

but imposes on all parties an obligation to act with “honesty in fact.” x x

x[19]

(Emphasis added)

Getty also laid the principle that the fictitious-payee rule extends protection

even to non-bank transferees of the checks.

In the case under review, the Rodriguez checks were payable to specified

payees. It is unrefuted that the 69 checks were payable to specific

persons. Likewise, it is uncontroverted that the payees were actual, existing, and

living persons who were members of PEMSLA that had a rediscounting

arrangement with spouses Rodriguez.

What remains to be determined is if the payees, though existing persons,

were “fictitious” in its broader context.

For the fictitious-payee rule to be available as a defense, PNB must show

that the makers did not intend for the named payees to be part of the transaction

involving the checks. At most, the bank’s thesis shows that the payees did not

have knowledge of the existence of the checks. This lack of knowledge on the

part of the payees, however, was not tantamount to a lack of intention on the

part of respondents-spouses that the payees would not receive the checks’

proceeds. Considering that respondents-spouses were transacting with PEMSLA

and not the individual payees, it is understandable that they relied on the

information given by the officers of PEMSLA that the payees would be receiving

the checks.

Verily, the subject checks are presumed order instruments. This is because,

as found by both lower courts, PNBfailed to present sufficient evidence to defeat

the claim of respondents-spouses that the named payees were the intended

recipients of the checks’ proceeds. The bank failed to satisfy a requisite condition

of a fictitious-payee situation – that the maker of the check intended for the payee

to have no interest in the transaction.

Because of a failure to show that the payees were “fictitious” in its broader

sense, the fictitious-payee rule doesnot apply. Thus, the checks are to be deemed

payable to order. Consequently, the drawee bank bears the loss.[20]

PNB was remiss in its duty as the drawee bank. It does not dispute the

fact that its teller or tellers accepted the 69 checks for deposit to the PEMSLA

account even without any indorsement from the named payees. It bears stressing

that order instruments can only be negotiated with a valid indorsement.

A bank that regularly processes checks that are neither payable to the

customer nor duly indorsed by the payee is apparently grossly negligent in its

operations.[21]

This Court has recognized the unique public interest possessed by

the banking industry and the need for the people to have full trust and confidence

in their banks.[22]

For this reason, banks are minded to treat their customer’s

accounts with utmost care, confidence, and honesty.[23]

In a checking transaction, the drawee bank has the duty to verify the

genuineness of the signature of the drawer and to pay the check strictly in

accordance with the drawer’s instructions, i.e., to the named payee in the check. It

should charge to the drawer’s accounts only the payables authorized by the

latter. Otherwise, the drawee will be violating the instructions of the drawer and it

shall be liable for the amount charged to the drawer’s account.[24]

In the case at bar, respondents-spouses were the bank’s depositors. The

checks were drawn against respondents-spouses’ accounts. PNB, as the drawee

bank, had the responsibility to ascertain the regularity of the indorsements, and the

genuineness of the signatures on the checks before accepting them for

deposit. Lastly, PNB was obligated to pay the checks in strict accordance with the

instructions of the drawers. Petitioner miserably failed to discharge this burden.

The checks were presented to PNB for deposit by a representative of

PEMSLA absent any type of indorsement, forged or otherwise. The facts clearly

show that the bank did not pay the checks in strict accordance with the instructions

of the drawers, respondents-spouses. Instead, it paid the values of the checks not

to the named payees or their order, but to PEMSLA, a third party to the transaction

between the drawers and the payees.

Moreover, PNB was negligent in the selection and supervision of its

employees. The trustworthiness of bank employees is indispensable to maintain

the stability of the banking industry. Thus, banks are enjoined to be extra vigilant

in the management and supervision of their employees. In Bank of the

Philippine Islands v. Court of Appeals,[25]

this Court cautioned thus:

Banks handle daily transactions involving millions of pesos. 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. For obvious reasons, the banks are

expected to exercise the highest degree of diligence in the selection and

supervision of their employees.[26]

PNB’s tellers and officers, in violation of banking rules of procedure,

permitted the invalid deposits of checks to the PEMSLA account. Indeed, when it

is the gross negligence of the bank employees that caused the loss, the bank should

be held liable.[27]

PNB’s argument that there is no loss to compensate since no demand for

payment has been made by the payees must also fail. Damage was caused to

respondents-spouses when the PEMSLA checks they deposited were returned for

the reason “Account Closed.” These PEMSLA checks were the corresponding

payments to the Rodriguez checks. Since they could not encash the PEMSLA

checks, respondents-spouses were unable to collect payments for the amounts they

had advanced.

A bank that has been remiss in its duty must suffer the consequences of its

negligence. Being issued to named payees, PNB was duty-bound by law and by

banking rules and procedure to require that the checks be properly indorsed before

accepting them for deposit and payment. In fine, PNB should be held liable for the

amounts of the checks.

One Last Note

We note that the RTC failed to thresh out the merits of PNB’s cross-claim

against its co-defendants PEMSLA and MPC. The records are bereft of any

pleading filed by these two defendants in answer to the complaint of respondents-

spouses and cross-claim of PNB. The Rules expressly provide that failure to file

an answer is a ground for a declaration that defendant

is in default.[28]

Yet, the RTC failed to sanction the failure of both PEMSLA and

MPC to file responsive pleadings. Verily, the RTC dismissal of PNB’s cross-claim

has no basis. Thus, this judgment shall be without prejudice to whatever action the

bank might take against its co-defendants in the trial court.

To PNB’s credit, it became involved in the controversial transaction not of

its own volition but due to the actions of some of its employees. Considering that

moral damages must be understood to be in concept of grants, not punitive or

corrective in nature, We resolve to reduce the award of moral damages

to P50,000.00.[29]

WHEREFORE, the appealed Amended Decision is AFFIRMED with the

MODIFICATION that the award for moral damages is reduced to P50,000.00,

and that this is without prejudice to whatever civil, criminal, or administrative

action PNB might take against PEMSLA, MPC, and the employees involved.

SO ORDERED.

RUBEN T. REYES

Associate Justice

WE CONCUR:

CONSUELO YNARES-SANTIAGO

Associate Justice

Chairperson

MA. ALICIA AUSTRIA-MARTINEZ MINITA V. CHICO-NAZARIO

Associate Justice Associate Justice

ANTONIO EDUARDO B. NACHURA

Associate Justice

A T T E S T A T I O N

I attest that the conclusions in the above Decision had been reached in

consultation before the case was assigned to the writer of the opinion of the

Court’s Division.

CONSUELO YNARES-SANTIAGO

Associate Justice

Chairperson

C E R T I F I C A T I O N

Pursuant to Section 13, Article VIII of the Constitution and the Division

Chairperson’s Attestation, I certify that the conclusions in the above Decision had

been reached in consultation before the case was assigned to the writer of the

opinion of the Court’s Division.

REYNATO S. PUNO

Chief Justice

[1]

CA-G.R. CV No. 76645 dated October 11, 2005. Penned by Associate Justice Isaias P. Dicdican, with Associate

Justices Pampio A. Abarintos and Ramon M. Bato, Jr., concurring; rollo, pp. 29-42. [2]

Civil Case No. 99-10892, Regional Trial Court in Negros Occidental, Branch 51, Bacolod City, dated May 10,

2002; CA rollo, pp. 63-72. [3]

A financing scheme where a postdated check is exchanged for a current check with a discounted face value.

[4] Current Account No. 810480-4 in the name of Erlando T. Rodriguez

Name of Payees Check No. Date Issued Amount 01. Simon Carmelo B. Libo-on 0001110 11.27.98 40,934.00 02. Simon Carmelo Libo-on 0000011589 02.01.99 29,877.00 03. Simon Libo-on 0000011567 01.25.99 50,350.00 04. Pacifico Castillo 0000011565 01.22.99 39,995.00 05. Jose Bago-od 0000011587 02.01.99 38,000.00 06. Dioleto Delcano 0000011594 02.02.99 28,500.00 07. Antonio Maravilla 0000011593 02.02.99 37,715.00 08. Josel Juguan 0000011595 02.02.99 45,002.00 09. Domingo Roa, Jr. 0000011591 02.01.99 35,373.00 10. Antonio Maravilla 0001657 02.05.99 39,900.00 11. Christy Mae Berden 0001655 02.05.99 28,595.00 12. Nelson Guadalupe 0000011588 02.01.99 34,819.00 13. Antonio Londres 0000011596 02.05.99 32,851.00 14. Arnel Navarosa 0000011597 02.05.99 28,785.00 15. Estrella Alunan 0000011600 02.05.99 32,509.00 16. Dennis Montemayor 0000011598 02.05.99 43,691.00 17. Mickle Argusar 0000011599 02.05.99 31,498.00 18. Perlita Gallego 0000011564 01.21.99 38,000.00 19. Sheila Arcobillas 0000011563 01.19.99 38,000.00 20. Danilo Villarosa 0001656 02.05.99 32,006.00 21. Almie Borce 0000011583 02.01.99 20,093.00 22. Ronie Aragon 0000011566 01.20.99 28,844.00 Total: 775,337.00

Current Account No. 810624-6 in the name of Erlando and/or Norma Rodriguez Name of Payees Check No. Date Issued Amount

01. Elma Bacarro 0001944 01.15.99 37,449.00 02. Delfin Recarder 0001927 01.14.99 30,020.00 03. Elma Bacarro 0001926 01.14.99 34,884.00 04. Perlita Gallego 0001924 01.14.99 35,502.00 05. Jose Weber 0001932 01.14.99 38,323.00 06. Rogelio Alfonso 0001922 01.14.99 43,852.00 07. Gianni Amantillo 0001928 01.14.99 32,414.00 08. Eddie Bago-od 0001929 01.14.99 38,361.00 09. Manuel Longero 0001933 01.14.99 38,285.00 10. Anavic Lorenzo 0001923 01.14.99 29,982.00 11. Corazon Salva 0001945 01.15.99 37,449.00 12. Arlene Diamante 0001951 01.18.99 39,995.00 13. Joselin Laurilla 0001955 01.18.99 37,221.00 14. Andy Javellana 0001960 01.22.99 30,923.00 15. Erdelinda Porras 0001958 01.22.99 40,679.00 16. Nelson Guadalupe 0001956 01.18.99 24,700.00 17. Barnard Escano 0001969 01/22/99 38,304.00

Name of Payees Check No. Date Issued Amount 18. Buena Coscolluela 0001968 01/22/99 37,706.00 19. Erdelinda Porras 0002021 02/01/99 36,727.00 20. Neda Algara 0002023 02/01/99 38,000.00 21. Eddie Bago-od 0002030 02/02/99 26,600.00 22. Gianni Amantillo 0002032 02/02/99 19,000.00 23. Alfredo Llena 0002020 02/01/99 32,282.00 24. Emmanuel Fermo 0001972 01/22/99 36,376.00 25. Yvonne Ano-os 0001967 01/22/99 36,566.00 26. Joel Abibuag 0002022 02/01/99 37,981.00 27. Ma. Corazon Salva 0002029 02/02/99 25,270.00 28. Jose Bago-od 0001957 01/18/99 34,656.00 29. Avelino Brion 0001965 01/22/99 31,882.00 30. Mickle Algusar 0001962 01/22/99 25,004.00 31. Jose Weber 0001959 01/22/99 37,001.00 32. Joel Velasco 0002028 02/02/99 9,500.00 33. Elma Bacarro 0002031 02/02/99 23,750.00 34. Grace Tambis 0001952 01/18/99 39,995.00 35. Proceso Mailim 0001980 01/21/99 37,193.00 36. Ronnie Aragon 0001983 01/22/99 30,324.00 37. Danilo Villarosa 0001931 01/14/99 31,008.00 38. Joel Abibuag 0001954 01/18/99 26,600.00 39. Danilo Villarosa 0001984 01/22/99 26,790.00 40. Reynard Guia 0001985 01/22/99 42,959.00 41. Estrella Alunan 0001925 01/14/99 39,596.00 42. Eddie Bago-od 0001982 01/22/99 31,018.00 43. Jose Bago-od 0001982 01/22/99 37,240.00 44. Nicandro Aguilar 0001964 01/22/99 52,250.00 45. Guandencia Banaston 0001963 01/22/99 38,000.00 46. Dennis Montemayor 0001961 01/22/99 26,600.00 47. Eduardo Buglosa 0002027 01/02/99 14,250.00 Total ……………… 1,570,467.00 Grand Total ………. 2,345,804.00 [5]

Rollo, pp. 64-69. [6]

CA rollo, pp. 71-72. [7]

Rollo, pp. 44-49. Penned by Associate Justice Isaias P. Dicdican, with Associate Justices Elvi John S. Asuncion

and Ramon M. Bato, Jr., concurring. [8]

Id. at 47. [9]

Id. at 41. [10]

Veluz v. Justice of the Peace of Sariaga, 42 Phil. 557 (1921). [11]

Negotiable Instruments Law, Sec. 185. Check defined. – A check is a bill of exchange drawn on a bank payable

on demand. Except as herein otherwise provided, the provisions of this Act applicable to a bill of exchange payable

on demand apply to a check.

Section 126. Bill of exchange defined. – A bill of exchange is an unconditional order in writing addressed by one

person to another, signed by the person giving it, requiring the person to whom it is addressed to pay on demand or

at a fixed or determinable future time a sum certain in money to order or to bearer. [12]

Id. [13]

Campos, J.C., Jr. and Lopez-Campos, M.C., Notes and Selected Cases on Negotiable Instruments Law (1994),

5th ed., pp. 8-9. [14]

Bourne v. Maryland Casualty, 192 SE 605 (1937); Norton v. City Bank & Trust Co., 294 F. 839 (1923); United

States v. Chase Nat. Bank, 250 F. 105 (1918). [15]

Mueller & Martin v. Liberty Insurance Bank, 187 Ky. 44, 218 SW 465 (1920). [16]

Id. [17]

Mueller & Martin v. Liberty Insurance Bank, id.

[18] 90 NY 2d 322 (1997), citing the Uniform Commercial Code, Sec. 3-405.

[19] Getty Petroleum Corp. v. American Express Travel Related Services Company, Inc., id., citing Peck v. Chase

Manhattan Bank, 190 AD 2d 547, 548-549 (1993); Touro Coll. v. Bank Leumi Trust Co., 186 AD 2d 425, 427

(1992); Prudential-Bache Sec. v. Citibank, N.A., 73 NY 2d 276 (1989); Merrill Lynch, Pierce, Fenner & Smith v.

Chemical Bank, 57 NY 2d 447 (1982). [20]

See Traders Royal Bank v. Radio Philippines Network, Inc., G.R. No. 138510, October 10, 2002, 390 SCRA

608. [21]

Id. [22]

Metropolitan Bank and Trust Company v. Cabilzo, G.R. No. 154469, December 6, 2006, 510 SCRA 259. [23]

Citytrust Banking Corporation v. Intermediate Appellate Court, G.R. No. 84281, May 27, 1994, 232 SCRA

559; Bank of the Philippine Islands v. Intermediate Appellate Court, G.R. No. 69162, February 21, 1992, 206 SCRA

408. [24]

Associated Bank v. Court of Appeals, G.R. Nos. 107382 & 107612, January 31, 1996, 252 SCRA 620, 631. [25]

G.R. No. 102383, November 26, 1992, 216 SCRA 51. [26]

Bank of the Philippine Islands v. Court of Appeals, id. at 71. [27]

Id. at 77. [28]

Rules of Civil Procedure, Rule 9, Sec. 3. Default: declaration of. – If the defending party fails to answer within

the time allowed therefor, the court shall, upon motion of the claiming party with notice to the defending party, and

proof of such failure, declare the defending party in default. Thereupon, the court shall proceed to render judgment

granting the claimant such relief as his pleading may warrant, unless the court in its discretion requires the claimant

to submit evidence. Such reception of evidence may be delegated to the clerk of court. [29]

Morales v. Court of Appeals, G.R. No. 117228, June 19, 1997, 274 SCRA 282.

FIRST DIVISION

[G.R. No. 126670. December 2, 1999]

ERNESTO T. PACHECO and VIRGINIA O. PACHECO, petitioners, vs.

HON. COURT OF APPEALS and PEOPLE OF THE

PHILIPPINES, respondents.

D E C I S I O N

YNARES_SANTIAGO, J.:

Petitioner spouses are engaged in the construction business. Complainant Romualdo

Vicencio was a former Judge and his wife, Luz Vicencio, owns a pawnshop in Samar. On May

17, 1989, due to financial difficulties arising from the repeated delays in the payment of their

receivables for the construction projects from the DPWH,[1] petitioners were constrained to

obtain a loan of P10,000.00 from Mrs. Vicencio. The latter acceded. Instead of merely requiring

a note of indebtedness, however, her husband Mr. Vicencio required petitioners to issue an

undated check as evidence of the loan which allegedly will not be presented to the bank. Despite

being informed by petitioners that their bank account no longer had any funds, Mrs. Vicencio

insisted that they issue the check, which according to her was only a formality. Thus, petitioner

Virginia Pacheco issued on May 17, 1989 an undated RCBC[2] check with number CT 101756

for P10,000.00. However, she only received the amount of P9,000.00 as the 10% interest on the

loan was already deducted. Mrs. Vicencio also required Virginia’s husband, herein petitioner

Ernesto Pacheco, to sign the check on the same understanding that the check is not to be

encashed but merely intended as an evidence of indebtedness which cannot be negotiated.

On June 14, 1989, Virginia obtained another loan of P50,000.00 from Mrs. Vicencio. She

received only P35,000.00 as the previous loan of P10,000.00 as well as the 10% interest

amounting to P5,000.00 on the new loan were deducted by the latter. With the payment of the

previous debt, Virginia asked for the return of the first check (RCBC check no. 101756) but Mrs.

Vicencio told her that her filing clerk was absent. Despite several demands for the return of the

first check, Mrs. Vicencio told Virginia that they can no longer locate the folder containing that

check. For the new loan, she also required Virginia to issue three (3) more checks in various

amounts – two checks for P20,000.00 each and the third check for P10,000.00. Petitioners were

not amenable to these requirements, but Mrs. Vicencio insisted that they issue the same assuring

them that the checks will not be presented to the banks but will merely serve as guarantee for the

loan since there was no promissory note required of them. Due to her dire financial needs,

Virginia issued three undated RCBC checks numbered 101783 and 101784 in the sum of

P20,000.00 each and 101785 for P10,000.00, and again informed Mrs. Vicencio that the checks

cannot be encashed as the same were not funded. Petitioner Ernesto also signed the three checks

as required by Mrs. Vicencio on the same conditions as the first check.

On June 20 and July 21, 1989, petitioner Virginia obtained two more loans, one for

P10,000.00 and another for P15,000.00. Again she issued two more RCBC checks (No. 101768

for P10,000.00 and No. 101774 for P15,000.00) as required by Mrs. Vicencio with the same

assurance that the checks shall not be presented for payment but shall stand only as evidence of

indebtedness in lieu of the usual promissory note.

All the checks were undated at the time petitioners handed them to Mrs. Vicencio. The six

checks represent a total obligation of P85,000.00. However, since the loan of P10,000.00 under

the first check was already paid when the amount thereof was deducted from the proceeds of the

second loan, the remaining account was only P75,000.00. Of this amount, petitioners were able

to settle and pay in cash P60,000.00 in July 1989. Petitioners never had any transaction nor ever

dealt with Mrs. Vicencio’s husband, the complainant herein.

When the remaining balance of P15,000.00 on the loans became due and demandable,

petitioners were not able to pay despite demands to do so. On August 3, 1992, Mrs. Vicencio

together with her husband and their daughter Lucille, went to petitioners’ residence to persuade

Virginia to place the date “August 15, 1992” on checks nos. 101756 and 101774, although said

checks were respectively given undated to Mrs. Vicencio on May 17, 1989 and July 21, 1989.

Check no. 101756 was required by Mrs. Vicencio to be dated as additional guarantee for the

P15,000.00 unpaid balance allegedly under check no. 101774. Despite being informed by

petitioner Virginia that their account with RCBC had been closed as early as August 17, 1989,

Mrs. Vicencio and her daughter insisted that she place a date on the checks allegedly so that it

will become evidence of their indebtedness. The former reluctantly wrote the date on the checks

for fear that she might not be able to obtain future loans from Mrs. Vicencio.

Later, petitioners were surprised to receive on August 29, 1992 a demand letter from Mrs.

Vicencio’s spouse informing them that the checks when presented for payment on August 25,

1992 were dishonored due to “Account Closed”. Consequently, upon the complaint of Mrs.

Vicencio’s husband with whom petitioners never had any transaction, two informations for

estafa, defined in Article 315(2)(d) of the Revised Penal Code, were filed against them. The

informations which were amended on April 1, 1993 alleged that petitioners “through fraud and

false pretenses and in payment of a diamond ring (gold necklace)” issued checks which when

presented for payment were dishonored due to account closed.[3] After entering a plea of not

guilty during arraignment, petitioners were tried and sentenced to suffer imprisonment and

ordered to indemnify the complainant in the total amount of P25,000.00.[4] On appeal, the Court

of Appeals (CA) affirmed the decision of the court a quo.[5] Hence this petition.

Estafa may be committed in several ways. One of these is by postdating a check or issuing a

check in payment of an obligation, as provided in Article 315, paragraph 2(d) of the RPC, viz:

“ART. 315. Swindling (estafa). Any person who shall defraud another by any of the

means mentioned hereinbelow shall be punished by:

x x x x x x x x x

2. By means of any of the following false pretenses or fraudulent acts executed prior

to or simultaneously with the commission of the fraud:

x x x x x x x x x

(d) By postdating a check, or issuing a check in payment of an obligation when the

offender had no funds in the bank, or his funds deposited therein were not sufficient to

cover the amount of the check. The failure of the drawer of the check to deposit the

amount necessary to cover his check within three (3) days from receipt of notice from

the bank and/or the payee or holder that said check has been dishonored for lack or

insufficiency of funds shall be prima facie evidence of deceit constituting false

pretense or fraudulent act.”

The essential elements in order to sustain a conviction under the above paragraph are:

1. that the offender postdated or issued a check in payment of an obligation contracted at the

time the check was issued;

2. that such postdating or issuing a check was done when the offender had no funds in the bank,

or his funds deposited therein were not sufficient to cover the amount of the check;

3. deceit or damage to the payee thereof.[6]

The first and third elements are not present in this case. A check has the character of

negotiability and at the same time it constitutes an evidence of indebtedness. By mutual

agreement of the parties, the negotiable character of a check may be waived and the instrument

may be treated simply as proof of an obligation. There cannot be deceit on the part of the obligor,

petitioners herein, because they agreed with the obligee at the time of the issuance and postdating

of the checks that the same shall not be encashed or presented to the banks. As per assurance of

the lender, the checks are nothing but evidence of the loan or security thereof in lieu of and for

the same purpose as a promissory note. By their own covenant, therefore, the checks became

mere evidence of indebtedness. It has been ruled that a drawer who issues a check as security or

evidence of investment is not liable for estafa.[7] Mrs. Vicencio could not have been deceived nor

defrauded by petitioners in order to obtain the loans because she was informed that they no

longer have funds in their RCBC accounts. In 1992, when the Vicencio family asked Virginia to

place a date on the check, the latter again informed Mrs. Vicencio that their account with RCBC

was already closed as early as August 1989. With the assurance, however, that the check will

only stand as a firm evidence of indebtedness, Virginia placed a date on the check. Under these

circumstances, Mrs. Vicencio cannot claim that she was deceived or defrauded by petitioners in

obtaining the loan. In the absence of the essential element of deceit,[8] no estafa was committed

by petitioners.

Both courts below relied so much on the fact that Mrs. Vicencio’s husband is a former Judge

who knows the law. He should have known, then, that he need not even ask the petitioners to

place a date on the check, because as holder of the check, he could have inserted the date

pursuant to Section 13 of the Negotiable Instruments Law (NIL).[9] Moreover, as stated in

Section 14 thereof, complainant, as the person in possession of the check, has prima

facie authority to complete it by filling up the blanks therein. Besides, pursuant to Section 12 of

the same law, a negotiable instrument is not rendered invalid by reason only that it is antedated

or postdated.[10] Thus, the allegation of Mrs. Vicencio that the date to be placed by Virginia was

necessary so as to make the check evidence of indebtedness is nothing but a ploy. Petitioners

openly disclosed and never hid the fact that they no longer have funds in the bank as their bank

account was already closed. Knowledge by the complainant that the drawer does not have

sufficient funds in the bank at the time it was issued to him does not give rise to a case for estafa

through bouncing checks.[11]

Moreover, a check must be presented within a reasonable time from issue.[12] By current

banking practice, a check becomes stale after more than six (6) months. In fact a check long

overdue for more than two and one-half years is considered stale.[13] In this case, the checks were

issued more than three years prior to their presentment. In his complaint, complainant alleged

that petitioners bought jewelry from him and that he would not have parted with his jewelry had

not petitioners issued the checks. The evidence on record, however, does not support the theory

of the crime.

There were six checks given by petitioners to Mrs. Vicencio but only two were presented for

encashment. If all were issued in payment of the alleged jewelry, why were not all the checks

presented? There was a deliberate choice of these two checks as the total amount reflected

therein is equivalent to the amount due under the unpaid obligation. The other checks, on the

other hand, could not be used as the amounts therein do not jibe with the amount of the unpaid

balance. Following complainant’s theory that he would not have sold the jewelries had not

petitioners issued “postdated” checks, still no estafa can be imputed to petitioners. It is clear that

the checks were not intended for encashment with the bank, but were delivered as mere security

for the payment of the loan and under an agreement that the checks would be redeemed with

cash as they fell due. Hence, the checks were not intended by the parties to be modes of payment

but only as promissory notes. Since complainant and his wife were well aware of that fact, they

cannot now complain there was deception on the part of petitioners. Awareness by the

complainant of the fictitious nature of the pretense cannot give rise to estafa by means of

deceit.[14] When the payee was informed by the drawer that the checks are not covered by

adequate funds it does not give rise to bad faith or estafa.[15]

Moreover, complainant’s allegations that the two subject checks were issued in 1992 as

payment for the jewelry he allegedly sold to petitioners is belied by the evidence on record. First,

complainant is not engaged in the sale of jewelry.[16] Neither are petitioners. If the pieces of

jewelry were important to complainant considering that they were with him for more than

twenty-five years already,[17] he would not have easily parted with them in consideration for

unfunded personal checks in favor of persons whose means of living or source of income were

unknown to him.[18] Applicable here is the legal precept that persons are presumed to have taken

care of their business.[19]

Second, petitioners’ bank account with RCBC was opened on March 26, 1987 and was

closed on April 17, 1989, during the span of which they were issued 10 check booklets with the

last booklet issued on April 6, 1989. This last booklet contains 50 checks consecutively

numbered from 101751 to 101800. The two subject checks came from this booklet. All the

checks in this booklet were issued in the year 1989 including the two subject checks, so that the

complainants’ theory that the jewelry were sold in 1992 cannot be believed.

The rule that factual findings of the trial court bind this court is not absolute but admits of

exceptions such as when the conclusion is a finding grounded on speculation, surmise, and

conjecture and when the findings of the lower court is premised on the absence of evidence and

is contradicted by the evidence on record.[20] Based on the foregoing discussions, this Court is

constrained to depart from the general rule. Equally applicable is what Vice-Chancellor Van

Fleet once said:[21]

“Evidence to be believed must not only proceed from the mouth of a credible witness

but must be credible in itself – such as the common experience and observation of

mankind can approve as probable under the circumstances. We have no test of the

truth of human testimony, except its conformity to our knowledge, observation and

experience. Whatever is repugnant to these belongs to the miraculous, and is outside

of judicial cognizance.”

Petitioners, however, are not without liability. An accused acquitted of a criminal charge

may nevertheless be held civilly liable in the same case where the facts established by the

evidence so warrant.[22] Based on the records, they still have an outstanding obligation of

P15,000.00 in favor of Mrs. Vicencio. There was mention that the loan shall earn interests.

However, an agreement as to payment of interest must be in writing, otherwise it cannot be

valid,[23] although there was actual payment of interests by virtue of the advance deductions from

the loan. Once the judgment becomes final and executory, the amount due is deemed equivalent

to a forbearance of credit during the interim period from the finality of judgment until full

payment, in which case it shall earn legal interest at the rate of twelve per cent (12%) per

annum pursuant to Central Bank (CB) Circular No. 416.[24]

WHEREFORE, the assailed Decision is REVERSED and SET ASIDE. Petitioners are

ACQUITTED of the charge of estafa but they are ORDERED to pay Mrs. Vicencio the amount

of P15,000.00 without interest. However, from the time this judgment becomes final and

executory, the amount due shall earn legal interest of twelve percent (12%) per annum until full

payment.

SO ORDERED.

Davide, Jr., C.J., (Chairman), Puno, Kapunan, and Pardo, JJ., concur.

[1] Department of Public Works and Highways.

[2] Rizal Commercial Banking Corporation.

[3] Except as to the date and time of commission, the jewelries involved, the amount of the check and the check

number, the amended informations in Criminal Case No. C-1708-1709 identically read: “That on or about the

15th day of August, 1992, at about 8:00 o’clock in the morning, in the Municipality of Catarman, Province of

Northern Samar, Philippines and within the jurisdiction of this Honorable Court, the above-named accused,

conspiring, confederating and helping one another, with intent to gain, through fraud and false pretenses and in

payment of a diamond ring, did, then and there wilfully and unlawfully issue an RCBC Check with No. CT 101774

in the amount of FIFTEEN THOUSAND (P15,000.00) PESOS, and when presented for payment on August 19,

1992, the RCBC in Catarman dishonored the check on the ground that it was drawn against “ACCOUNT

CLOSED”, and despite notice accused failed to pay to the actual damage and prejudice of Romualdo Vicencio in

the amount aforestated.” (Regional Trial Court (RTC) Records in Criminal Case No. C-1709, p. 24).

[4] The dispositive portion of the RTC Decision (Branch 19, Catarman, Northern Samar) dated August 4, 1993

penned by Judge Cesar R. Cinco, p. 6 reads: “WHEREFORE, the Court hereby finds Ernesto Pacheco y Tambuyat,

also known as Erning, and Virginia Pacheco y Oledan, also known as Virgie, GUILTY beyond reasonable doubt as

co-principals in the crimes of estafa defined and penalized under paragraph 2(d) of Article 315 of the Revised Penal

Code, amended by Republic Act 4885 and Presidential Decree 818, as charged under the informations and sentences

each, to wit:

In Criminal Case No. C-1708, to suffer an imprisonment ranging from EIGHT (8) YEARS, EIGHT (8) MONTHS

and ONE (1) DAY of prision mayor, as minimum, to FOURTEEN (14) YEARS, EIGHT (8) MONTHS and ONE

(1) DAY of reclusion temporal, as maximum, to jointly and severally indemnify Atty. Romualdo Vicencio in the

amount of P15,000.00 and to pay the costs; and,

In Criminal Case No. C-1709, to suffer an imprisonment ranging from EIGHT (8) YEARS, EIGHT (8) MONTHS

and ONE (1) DAY, as minimum, to TEN (10) YEARS, EIGHT (8) MONTHS and ONE (1) day, as maximum,

of prision mayor, to indemnify jointly and severally Atty. Romualdo Vicencio in the amount of P10,000.00 and to

pay the costs. SO ORDERED.” (Rollo, p. 128).

[5] The dispositive portion of the Court of Appeals (CA) Decision promulgated March 19, 1996 penned by Justice

Romeo Callejo, Sr. with Justices Antonio Martinez (now a retired member of this Court) and Delilah Vidallon-

Magtolis, concurring, p. 14 reads: “IN THE LIGHT OF THE FOREGOING, the Decision appealed from is hereby

AFFIRMED in toto. With costs against the Appellants. SO ORDERED.” (Rollo, p. 21).

[6] People v. Ong, 204 SCRA 942 (1991); People v. Tugbang, 196 SCRA 341 (1991); Sales v. CA, 164 SCRA 717

(1988); People v. Sabio, Jr., 86 SCRA 568 (1978).

[7] People v. Tugbang, 196 SCRA 341 (1991).

[8] Buaya v. Polo, 169 SCRA 471 (1989); People v. Grospe, 157 SCRA 154 (1988); US v. Rivera, 23 Phil. 383.

[9] When date may be inserted. – Where an instrument expressed to be payable at a fixed period after date is issued

undated, or where the acceptance of an instrument payable at a fixed period after sight is undated, any holder may

insert therein the true date of issue or acceptance, and the instrument shall be payable accordingly. The insertion of

a wrong date does not avoid the instrument in the hands of a subsequent holder in due course; but as to him, the date

so inserted is to be regarded as the true date. (Italics supplied).

[10] Ante-dated and post-dated. – The instrument is not invalid for the reason only that it is ante-dated or post-dated,

provided this is not done for an illegal or fraudulent purpose. The person to whom an instrument so dated is

delivered acquires the title thereto as of the date of delivery.

[11] See Magno v. CA, 210 SCRA 471 (1992).

[12] Section 186, NIL. Within what time a check must be presented. - A check must be presented for payment within

a reasonable time after its issue or the drawer will be discharged from liability thereon to the extent of the loss

caused by the delay.

[13] Montinola v. Philippine National Bank, 88 Phil. 178 (1951).

[14] People v. Concepcion, 44 Phil. 544.

[15] Firestone Tire and Rubber Co. of the Philippines v. Inez Chavez and Co., 18 SCRA 356 (1966).

[16] Transcript of Stenographic Notes (TSN), July 20, 1993, p. 49.

[17] TSN, April 29, 1993, p. 12.

[18] TSN, April 29, 1993, p. 9.

[19] Rules of Court, Rule 131, Sec. 3. Disputable presumptions. - The following presumptions are satisfactory if

uncontradicted, but may be contradicted and overcome by other evidence:

x x x x x x x x x

(d) That a person takes ordinary care of his concerns;

x x x x x x x x x

(p) That private transactions have been fair and regular.

[20] Smith Kline & French Laboratories, Ltd. v. CA, 342 Phil. 187 citing among others Vda. De Alcantara v. CA, 252

SCRA 457 (1996); Republic v. IAC, 196 SCRA 335 (1991); Fernan v. CA, et al., 181 SCRA 546 (1990); People v.

Traya, 147 SCRA 381 (1987); Tolentino v. de Jesus, 56 SCRA 67 (1974).

[21] Cited in Daggers v. Van Dyck, 37 N.J. Eq., 130, 132; See also People v. Cara, 283 SCRA 96 (1997).

[22] People v. Tugbang, 196 SCRA 341 (1991); Nuñez v. CA, G.R. No. 80216, December 7, 1988, Minute

Resolution.

[23] Article 1956, New Civil Code.

[24] Philippine National Bank v. CA, 331 Phil. 1079, 263 SCRA 766 (1996) citing Eastern Shipping Lines v. CA, 234

SCRA 78 (1994).

THIRD DIVISION

[G.R. No. 148864. August 21, 2003]

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

D E C I S I O N

PUNO, J.:

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

Petitioners filed a complaint[1] for annulment of titles against respondents, Mercator Finance Corporation, Lydia P. Salazar, Lamecs Realty and Development Corporation, and the Register of Deeds of Bulacan. Petitioners claimed being the registered owners of five (5) parcels of land[2] contained in the Real Estate Mortgage[3] executed by them and Embassy Farms, Inc. (“Embassy Farms”). They alleged that they executed the Real Estate Mortgage in favor of Mercator Financing Corporation (“Mercator”) only as officers of Embassy Farms. They did not receive the proceeds of the loan evidenced by a promissory note, as all of it went to Embassy Farms. Thus, they contended that the mortgage was without any consideration as to them since they did not personally obtain any loan or credit accommodations. There being no principal obligation on which the mortgage rests, the real estate mortgage is void.[4] With the void mortgage, they assailed the validity of the foreclosure proceedings conducted by Mercator, the sale to it as the highest bidder in the public auction, the issuance of the transfer certificates of title to it, the subsequent sale of the same parcels of land to respondent Lydia P. Salazar (“Salazar”), and the transfer of the titles to her name, and lastly, the sale and transfer of the properties to respondent Lamecs Realty & Development Corporation (“Lamecs”).

Mercator admitted that petitioners were the owners of the subject parcels of land. It, however, contended that “on February 16, 1982, plaintiffs executed a Mortgage in favor of defendant Mercator Finance Corporation ‘for and in consideration of certain loans, and/or other forms of credit accommodations obtained from the Mortgagee (defendant Mercator Finance Corporation) amounting to EIGHT HUNDRED FORTY-FOUR THOUSAND SIX HUNDRED TWENTY-FIVE & 78/100 (P844,625.78) PESOS, Philippine Currency and to secure the payment of the same and those others that the MORTGAGEE may extend to the MORTGAGOR (plaintiffs) x x x.’”[5] It contended that since petitioners and Embassy Farms signed the promissory note [6] as co-makers, aside from the Continuing Suretyship Agreement[7] subsequently executed to guarantee the indebtedness of Embassy Farms, and the succeeding promissory notes[8] restructuring the loan, then petitioners are jointly and severally liable with Embassy Farms. Due to their failure to pay the obligation, the foreclosure and subsequent sale of the mortgaged properties are valid.

Respondents Salazar and Lamecs asserted that they are innocent purchasers for value and in good faith, relying on the validity of the title of Mercator. Lamecs admitted the prior ownership of petitioners of the subject parcels of land, but alleged that they are the present registered owner. Both respondents likewise assailed the long silence and inaction by petitioners as it was only after a lapse of almost ten (10) years from the foreclosure of the property and the subsequent sales that they made their claim. Thus, Salazar and Lamecs averred that petitioners are in estoppel and guilty of laches.[9]

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

a. Whether or not the Real Estate Mortgage executed by the plaintiffs in

favor of defendant Mercator Finance Corp. is null and void;

b. Whether or not the extra-judicial foreclosure proceedings undertaken on

subject parcels of land to satisfy the indebtedness of Embassy Farms,

Inc. is (sic) null and void;

c. Whether or not the sale made by defendant Mercator Finance Corp. in

favor of Lydia Salazar and that executed by the latter in favor of

defendant Lamecs Realty and Development Corp. are null and void;

d. Whether or not the parties are entitled to damages.[10]

After pre-trial, Mercator moved for summary judgment on the ground that except as to the amount of damages, there is no factual issue to be litigated. Mercator argued that petitioners had admitted in their pre-trial brief the existence of the promissory note, the continuing suretyship agreement and the subsequent promissory notes restructuring the loan, hence, there is no genuine issue regarding their liability. The mortgage, foreclosure proceedings and the subsequent sales are valid and the complaint must be dismissed.[11]

Petitioners opposed the motion for summary judgment claiming that because their personal liability to Mercator is at issue, there is a need for a full-blown trial.[12]

The RTC granted the motion for summary judgment and dismissed the complaint. It held:

A reading of the promissory notes show (sic) that the liability of the signatories

thereto are solidary in view of the phrase “jointly and severally.” On the promissory

note appears (sic) the signatures of Eduardo B. Evangelista, Epifania C. Evangelista

and another signature of Eduardo B. Evangelista below the words Embassy Farms,

Inc. It is crystal clear then that the plaintiffs-spouses signed the promissory note not

only as officers of Embassy Farms, Inc. but in their personal capacity as well(.)

Plaintiffs(,) by affixing their signatures thereon in a dual capacity have bound

themselves as solidary debtor(s) with Embassy Farms, Inc. to pay defendant Mercator

Finance Corporation the amount of indebtedness. That the principal contract of loan is

void for lack of consideration, in the light of the foregoing is untenable.[13]

Petitioners’ motion for reconsideration was denied for lack of merit. [14] Thus, petitioners went up to the Court of Appeals, but again were unsuccessful. The appellate court held:

The appellants’ insistence that the loans secured by the mortgage they executed were

not personally theirs but those of Embassy Farms, Inc. is clearly self-serving and

misplaced. The fact that they signed the subject promissory notes in the(ir) personal

capacities and as officers of the said debtor corporation is manifest on the very face of

the said documents of indebtedness (pp. 118, 128-131, Orig. Rec.). Even

assuming arguendo that they did not, the appellants lose sight of the fact that third

persons who are not parties to a loan may secure the latter by pledging or mortgaging

their own property (Lustan vs. Court of Appeals, 266 SCRA 663, 675). x x x. In

constituting a mortgage over their own property in order to secure the purported

corporate debt of Embassy Farms, Inc., the appellants undeniably assumed the

personality of persons interested in the fulfillment of the principal obligation who, to

save the subject realities from foreclosure and with a view towards being subrogated

to the rights of the creditor, were free to discharge the same by payment (Articles

1302 [3] and 1303, Civil Code of the Philippines).[15] (emphases in the original)

The appellate court also observed that “if the appellants really felt aggrieved by the foreclosure of the subject mortgage and the subsequent sales of the realties to other parties, why then did they commence the suit only on August 12, 1997 (when the certificate of sale was issued on January 12, 1987, and the certificates of title in the name of Mercator on September 27, 1988)?” Petitioners’ “procrastination for about nine (9) years is difficult to understand. On so flimsy a ground as lack of consideration, (w)e may even venture to say that the complaint was not worth the time of the courts.”[16]

A motion for reconsideration by petitioners was likewise denied for lack of merit.[17] Thus, this petition where they allege that:

THE COURT A QUO ERRED AND ACTED WITH GRAVE ABUSE OF

DISCRETION AMOUNTING TO LACK OR EXCESS OF JURISDICTION IN

AFFIRMING IN TOTO THE MAY 4, 1998 ORDER OF THE TRIAL COURT

GRANTING RESPONDENT’S MOTION FOR SUMMARY JUDGMENT DESPITE

THE EXISTENCE OF GENUINE ISSUES AS TO MATERIAL FACTS AND ITS

NON-ENTITLEMENT TO A JUDGMENT AS A MATTER OF LAW, THEREBY

DECIDING THE CASE IN A WAY PROBABLY NOT IN ACCORD WITH

APPLICABLE DECISIONS OF THIS HONORABLE COURT.[18]

We affirm.

Summary judgment “is a procedural technique aimed at weeding out sham claims or defenses at an early stage of the litigation.”[19] The crucial question in a motion for summary judgment is whether the issues raised in the pleadings are genuine or fictitious, as shown by affidavits, depositions or admissions accompanying the motion. A genuine issue means “an issue of fact which calls for the presentation of evidence, as distinguished from an issue which is fictitious or contrived so as not to constitute a genuine issue for trial.”[20] To forestall summary judgment, it is essential for the non-moving party to confirm the existence of genuine issues where he has substantial, plausible and fairly arguable defense, i.e., issues of fact calling for the presentation of evidence upon which a reasonable finding of fact could return a verdict for the non-

moving party. The proper inquiry would therefore be whether the affirmative defenses offered by petitioners constitute genuine issue of fact requiring a full-blown trial.[21]

In the case at bar, there are no genuine issues raised by petitioners. Petitioners do not deny that they obtained a loan from Mercator. They merely claim that they got the loan as officers of Embassy Farms without intending to personally bind themselves or their property. However, a simple perusal of the promissory note and the continuing suretyship agreement shows otherwise. These documentary evidence prove that petitioners are solidary obligors with Embassy Farms.

The promissory note[22] states:

For value received, I/We jointly and severally promise to pay to the order of

MERCATOR FINANCE CORPORATION at its office, the principal sum of EIGHT

HUNDRED FORTY-FOUR THOUSAND SIX HUNDRED TWENTY-FIVE PESOS

& 78/100 (P 844,625.78), Philippine currency, x x x, in installments as follows:

September 16, 1982 - P154,267.87

October 16, 1982 - P154,267.87

November 16, 1982 - P154,267.87

December 16, 1982 - P154,267.87

January 16, 1983 - P154,267.87

February 16, 1983 - P154,267.87

x x x x x x x x x.

The note was signed at the bottom by petitioners Eduardo B. Evangelista and Epifania C. Evangelista, and Embassy Farms, Inc. with the signature of Eduardo B. Evangelista below it.

The Continuing Suretyship Agreement[23] also proves the solidary obligation of petitioners, viz:

(Embassy Farms, Inc.)

Principal

(Eduardo B. Evangelista)

Surety

(Epifania C. Evangelista)

Surety

(Mercator Finance Corporation)

Creditor

To: MERCATOR FINANCE COPORATION

(1) For valuable and/or other consideration, EDUARDO B. EVANGELISTA and

EPIFANIA C. EVANGELISTA (hereinafter called Surety), jointly and severally

unconditionally guarantees (sic) to MERCATOR FINANCE COPORATION

(hereinafter called Creditor), the full, faithful and prompt payment and discharge of

any and all indebtedness of EMBASSY FARMS, INC. (hereinafter called Principal)

to the Creditor.

x x x x x x x x x

(3) The obligations hereunder are joint and several and independent of the obligations

of the Principal. A separate action or actions may be brought and prosecuted against

the Surety whether or not the action is also brought and prosecuted against the

Principal and whether or not the Principal be joined in any such action or actions.

x x x x x x x x x.

The agreement was signed by petitioners on February 16, 1982. The promissory notes[24] subsequently executed by petitioners and Embassy Farms, restructuring their loan, likewise prove that petitioners are solidarily liable with Embassy Farms.

Petitioners further allege that there is an ambiguity in the wording of the promissory note and claim that since it was Mercator who provided the form, then the ambiguity should be resolved against it.

Courts can interpret a contract only if there is doubt in its letter. [25] But, an examination of the promissory note shows no such ambiguity. Besides, assuming arguendo that there is an ambiguity, Section 17 of the Negotiable Instruments Law states, viz:

SECTION 17. Construction where instrument is ambiguous. – Where the

language of the instrument is ambiguous or there are omissions therein, the following

rules of construction apply:

x x x x x x x x x

(g) Where an instrument containing the word “I promise to pay” is signed by two or

more persons, they are deemed to be jointly and severally liable thereon.

Petitioners also insist that the promissory note does not convey their true intent in executing the document. The defense is unavailing. Even if petitioners intended to sign the note merely as officers of Embassy Farms, still this does not erase the fact that they subsequently executed a continuing suretyship agreement. A surety is one who is solidarily liable with the principal.[26] Petitioners cannot claim that they did not personally receive any consideration for the contract for well-entrenched is the rule that the

consideration necessary to support a surety obligation need not pass directly to the surety, a consideration moving to the principal alone being sufficient. A surety is bound by the same consideration that makes the contract effective between the principal parties thereto.[27] Having executed the suretyship agreement, there can be no dispute on the personal liability of petitioners.

Lastly, the parol evidence rule does not apply in this case.[28] We held in Tarnate v. Court of Appeals,[29] that where the parties admitted the existence of the loans and the mortgage deeds and the fact of default on the due repayments but raised the contention that they were misled by respondent bank to believe that the loans were long-term accommodations, then the parties could not be allowed to introduce evidence of conditions allegedly agreed upon by them other than those stipulated in the loan documents because when they reduced their agreement in writing, it is presumed that they have made the writing the only repository and memorial of truth, and whatever is not found in the writing must be understood to have been waived and abandoned.

IN VIEW WHEREOF, the petition is dismissed. Treble costs against the petitioners.

SO ORDERED.

Panganiban, and Sandoval-Gutierrez, JJ., concur. Corona, and Carpio-Morales, JJ., on official leave.

** Sometimes spelled as Lamecs.

[1] RTC of Malolos, Bulacan, Br. 85, Rollo, pp. 23-29.

[2] With Transfer Certificates of Title Nos. T-193458, T-192133, T-193136, T-193137 and T-193138; Id. at 30-39.

[3] Id. at 40.

[4] Id. at 26.

[5] Id. at 63.

[6] Id. at 71.

[7] Id. at 72-73.

[8] Id. at 80-83.

[9] Id. at 85-97.

[10] Id. at 118.

[11] Id. at 119-123.

[12] Id. at 128-131.

[13] Id. at 134, dated May 4, 1998.

[14] Id. at 159, dated July 17, 1998.

[15] Id. at 222-223, Decision dated May 12, 2000.

[16] Id. at 223.

[17] Id. at 234, dated May 14, 2001.

[18] Id. at 12.

[19] Evadel Realty and Development Corporation v. Soriano, 357 SCRA 395 (2001).

[20] Manufacturers Hanover Trust Co. and/or Chemical Bank v. Rafael Ma. Guerrero, G.R. No. 136804, February 19, 2003.

[21] Spouses Guillermo Agbada & Maxima Agbada v. Inter-urban Developers, et al., G.R. No. 144029, September 19, 2002.

[22] Rollo, p. 71.

[23] Id. at 72-73.

[24] Id. at 80-83.

[25] Article 1370. If the terms of a contract are clear and leave no doubt upon the intention of the contracting parties, the literal meaning of its stipulations shall control. (Civil Code of the Philippines); Ong Yong, et al., v. David S. Tiu, et al., G.R. Nos. 144476 & 144629, February 1, 2002.

[26] Goldenrod, Incorporated v. Court of Appeals, 366 SCRA 217 (2001).

[27] Charles Lee v. Court of Appeals, et al., G.R. Nos. 117913-14, February 1, 2002.

[28] SEC. 9. Evidence of written agreements – When the terms of an agreement have been reduced to writing, it is considered as containing all the terms agreed upon and there can be, between the parties and their successors in interest, no evidence of such terms other than the contents of the written agreement.

However, a party may present evidence to modify, explain or add to the terms of the written agreement if he puts in issue in his pleading:

(a) An intrinsic ambiguity, mistake or imperfection in the written agreement;

(b) The failure of the written agreement to express the true intent and agreement of the parties thereto;

(c) The validity of the written agreement; or

(d) The existence of other terms agreed to by the parties of their successors in interest after the execution of the written agreement.

The term “agreement” includes wills.

[29] 241 SCRA 254 (1995).