negotiable instruments full text cases 1

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ContentsTraders Royal Bank v. CA ...................................................................................................................... 1

Garcia v. Llamas .................................................................................................................................. 11

Metropolitan Bank and Trust Co. v. Court of Appeals ........................................................................ 18

Phil. Education Company Inc. v. Soriano ............................................................................................ 25

Republic v. Sandiganbayan ................................................................................................................. 28

Ilano v. Espanol ................................................................................................................................... 50

Equitable Banking Corp v. IAC ............................................................................................................. 57

Caltex Phils. v. Court of Appeals ......................................................................................................... 64

People v. Romero ................................................................................................................................ 72

PNB v. Rodriguez ................................................................................................................................. 78

Traders Royal Bank v. CA

G.R. No. 93397 March 3, 1997

TRADERS ROYAL BANK, petitioner,vs.COURT OF APPEALS, FILRITERS GUARANTY ASSURANCE CORPORATION and CENTRAL BANK of the

PHILIPPINES, respondents.

TORRES, JR., J.:

Assailed in this Petition for Review on Certiorari is the Decision of the respondent Court of Appealsdated 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 P500,000.00, from the Philippine Underwriters FinanceCorporation (Philfinance) to the petitioner Trader's Royal Bank (TRB), under a Repurchase Agreement 3dated 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 wasoriginally filed as a Petition for Mandamus 5 under Rule 65 of the Rules of Court, to compel the CentralBank of the Philippines to register the transfer of the subject CBCI to petitioner Traders Royal Bank(TRB).

In the said petition, TRB stated that:



3. On November 27, 1979, Filriters Guaranty Assurance Corporation (Filriters) executed a"Detached Assignment" . . ., whereby Filriters, as registered owner, sold, transferred, assigned anddelivered unto Philippine Underwriters Finance Corporation (Philfinance) all its rights and title to CentralBank Certificates of Indebtedness of PESOS: FIVE HUNDRED THOUSAND (P500,000) and having anaggregate value of PESOS: THREE MILLION FIVE HUNDRED THOUSAND (P3,500,000.00);

4. The aforesaid Detached Assignment (Annex "A") contains an express authorization executed bythe transferor intended to complete the assignment through the registration of the transfer in the nameof PhilFinance, which authorization is specifically phrased as follows: '(Filriters) hereby irrevocablyauthorized the said issuer (Central Bank) to transfer the said bond/certificates on the books of its fiscalagent;

5. On February 4, 1981, petitioner entered into a Repurchase Agreement with PhilFinance . . .,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 aface value of P500,000.00 . . ., which CBCI was among those previously acquired by PhilFinance fromFilriters as averred in paragraph 3 of the Petition;

6. Pursuant to the aforesaid Repurchase Agreement (Annex "B"), Philfinance agreed to repurchaseCBCI Serial No. D891 (Annex "C"), at the stipulated price of PESOS: FIVE HUNDRED NINETEENTHOUSAND THREE HUNDRED SIXTY-ONE & 11/100 (P519,361.11) on April 27, 1981;

7. PhilFinance failed to repurchase the CBCI on the agreed date of maturity, April 27, 1981, whenthe 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 thePetitioner to enable the latter to have its title completed and registered in the books of the respondent.And by means of said Detachment, 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." . . .

9. Petitioner presented the CBCI (Annex "C"), together with the two (2) aforementioned DetachedAssignments (Annexes "B" and "D"), to the Securities Servicing Department of the respondent, andrequested the latter to effect the transfer of the CBCI on its books and to issue a new certificate in thename of petitioner as absolute owner thereof;

10. Respondent failed and refused to register the transfer as requested, and continues to do sonotwithstanding 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 thepetitioner's request for registration, to wit:

"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 similarlynoted hereon, and upon payment of a nominal transfer fee which may be required, a new Certificateshall be issued to the transferee of the registered holder thereof."



and, without a doubt, the Detached Assignments presented to respondent were sufficientauthorizations in writing executed by the registered owner, Filriters, and its transferee, PhilFinance, asrequired by the above-quoted provision;

12. Upon such compliance with the aforesaid requirements, the ministerial duties of registering atransfer of ownership over the CBCI and issuing a new certificate to the transferee devolves upon therespondent;

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

On December 4, 1984, the Regional Trial Court the case took cognizance of the defendant Central Bankof the Philippines' Motion for Admission of Amended Answer with Counter Claim for Interpleader 6thereby calling to fore the respondent Filriters Guaranty Assurance Corporation (Filriters), the registeredowner of the subject CBCI as respondent.

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

11. Respondent is the registered owner of CBCI No. 891;

12. The CBCI constitutes part of the reserve investment against liabilities required of respondent asan insurance company under the Insurance Code;

13. Without any consideration or benefit whatsoever to Filriters, in violation of law and the trustfund doctrine and to the prejudice of policyholders and to all who have present or future claim againstpolicies issued by Filriters, Alfredo Banaria, then Senior Vice-President-Treasury of Filriters, without anyboard resolution, knowledge or consent of the board of directors of Filriters, and without any clearanceor authorization from the Insurance Commissioner, executed a detached assignment purportedly

assigning CBCI No. 891 to Philfinance;

xxx xxx xxx

14. Subsequently, Alberto Fabella, Senior Vice-President-Comptroller are Pilar Jacobe, Vice-President-Treasury of Filriters (both of whom were holding the same positions in Philfinance), withoutany consideration or benefit redounding to Filriters and to the grave prejudice of Filriters, its policyholders and all who have present or future claims against its policies, executed similar detachedassignment forms transferring the CBCI to plaintiff;

xxx xxx xxx

15. The detached assignment is patently void and inoperative because the assignment is withoutthe knowledge and consent of directors of Filriters, and not duly authorized in writing by the Board, asrequiring by Article V, Section 3 of CB Circular No. 769;

16. The assignment of the CBCI to Philfinance is a personal act of Alfredo Banaria and not thecorporate act of Filriters and such null and void;



a) The assignment was executed without consideration and for that reason, the assignment is voidfrom the beginning (Article 1409, Civil Code);

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

c) The CBCI constitutes reserve investment of Filriters against liabilities, which is a requirementunder the Insurance Code for its existence as an insurance company and the pursuit of its businessoperations. 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 of dimunition of reserve investments of Filriters is expressly prohibited by law, isimmoral and against public policy;

e) The assignment of the CBCI has resulted in the capital impairment and in the solvency deficiencyof Filriters (and has in fact helped in placing Filriters under conservatorship), an inevitable result knownto the officer who executed assignment.

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

a) The CBCI No. 891 is not a negotiable instrument and as a certificate of indebtedness is notpayable to bearer but is a registered in the name of Filriters;

b) The provision on transfer of the CBCIs provides that the Central Bank shall treat the registeredowner as the absolute owner and that the value of the registered certificates shall be payable only tothe registered owner; a sufficient notice to plaintiff that the assignments do not give them theregistered owner's right as absolute owner of the CBCI's;

c) CB Circular 769, Series of 1980 (Rules and Regulations Governing CBCIs) provides that theregistered certificates are payable only to the registered owner (Article II, Section 1).

18. Plaintiff knew full well that the assignment by Philfinance of CBCI No. 891 by Filriters is not aregular transaction made in the usual of ordinary course of business;

a) The CBCI constitutes part of the reserve investments of Filriters against liabilities requires by theInsurance Code and its assignment or transfer is expressly prohibited by law. There was no attempt toget 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;

c) The CBCI involved substantial amount and its assignment clearly constitutes disposition of "all orsubstantially all" of the assets of Filriters, which requires the affirmative action of the stockholders(Section 40, Corporation [sic] Code. 7

In its Decision 8 dated April 29, 1988, the Regional Trial Court of Manila, Branch XXXIII found theassignment 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 dispositiveportion of the decision reads:

ACCORDINGLY, judgment is hereby rendered in favor of the respondent Filriters Guaranty AssuranceCorporation and against the plaintiff Traders Royal Bank:

(a) Declaring the assignment of CBCI No. 891 in favor of PhilFinance, and the subsequentassignment of CBCI by PhilFinance in favor of the plaintiff Traders Royal Bank as null and void and of noforce and effect;

(b) Ordering the respondent Central Bank of the Philippines to disregard the said assignment and topay the value of the proceeds of the CBCI No. D891 to the Filriters Guaranty Assurance Corporation;

(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.

SO ORDERED. 9

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

The records reveal that defendant Filriters is the registered owner of CBCI No. D891. Under a deed ofassignment dated November 27, 1971, Filriters transferred CBCI No. D891 to Philippine UnderwritersFinance Corporation (Philfinance). Subsequently, Philfinance transferred CBCI No. D891, which was stillregistered in the name of Filriters, to appellant Traders Royal Bank (TRB). The transfer was made under arepurchase 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 right and thetitle to CBCI No. D891.

Armed with the deed of assignment, TRB then sought the transfer and registration of CBCI No. D891 inits 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.

Left with no other recourse, TRB filed a special civil action for mandamus against the Central Bank in theRegional Trial Court of Manila. The suit, however, was subsequently treated by the lower court as a caseof interpleader when CB prayed in its amended answer that Filriters be impleaded as a respondent andthe 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

In the appellate court, petitioner argued that the subject CBCI was a negotiable instrument, and havingacquired the said certificate from Philfinance as a holder in due course, its possession of the same isthus free fro any defect of title of prior parties and from any defense available to prior parties amongthemselves, and it may thus, enforce payment of the instrument for the full amount thereof against allparties liable thereon. 12



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

Obviously, the assignment of the certificate from Filriters to Philfinance was fictitious, having madewithout consideration, and did not conform to Central Bank Circular No. 769, series of 1980, betterknown as the "Rules and Regulations Governing Central Bank Certificates of Indebtedness", whichprovided that any "assignment of registered certificates shall not be valid unless made . . . by theregistered 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 wasinexistent, having acquired the certificate through simulation. What happened was Philfinance merelyborrowed CBCI No. D891 from Filriters, a sister corporation, to guarantee its financing operations.

Said the Court:

In the case at bar, Alfredo O. Banaria, who signed the deed of assignment purportedly for and on behalfof Filriters, did not have the necessary written authorization from the Board of Directors of Filriters toact for the latter. For lack of such authority, the assignment did not therefore bind Filriters and violatedas the same time Central Bank Circular No. 769 which has the force and effect of a law, resulting in thenullity of the transfer (People v. Que Po Lay, 94 Phil. 640; 3M Philippines, Inc. vs. Commissioner ofInternal Revenue, 165 SCRA 778).

In sum, Philfinance acquired no title or rights under CBCI No. D891 which it could assign or transfer toTraders Royal Bank and which the latter can register with the Central Bank.

WHEREFORE, the judgment appealed from is AFFIRMED, with costs against plaintiff-appellant.

SO ORDERED. 13

Petitioner's present position rests solely on the argument that Philfinance owns 90% of Filriters equityand the two corporations have identical corporate officers, thus demanding the application of thedoctrine or piercing the veil of corporate fiction, as to give validity to the transfer of the CBCI fromregistered owner to petitioner TRB. 14 This renders the payment by TRB to Philfinance of CBCI, as actualpayment to Filriters. Thus, there is no merit to the lower court's ruling that the transfer of the CBCI fromFilriters to Philfinance was null and void for lack of consideration.

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

The pertinent portions of the subject CBCI read:

xxx xxx xxx

The Central Bank of the Philippines (the Bank) for value received, hereby promises to pay bearer, of ifthis Certificate of indebtedness be registered, to FILRITERS GUARANTY ASSURANCE CORPORATION, theregistered owner hereof, the principal sum of FIVE HUNDRED THOUSAND PESOS.



xxx xxx xxx

Properly understood, a certificate of indebtedness pertains to certificates for the creation andmaintenance of a permanent improvement revolving fund, is similar to a "bond," (82 Minn. 202). Beingequivalent to a bond, it is properly understood as acknowledgment of an obligation to pay a fixed sumof money. It is usually used for the purpose of long term loans.

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, theregistered 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 anexpression of consent that the instrument may be transferred by negotiation. 15

A reading of the subject CBCI indicates that the same is payable to FILRITERS GUARANTY ASSURANCECORPORATION, 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.

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

As held in Caltex (Philippines), Inc. v. Court of Appeals, 16:

The accepted rule is that the negotiability or non-negotiability of an instrument is determined from thewriting, that is, from the face of the instrument itself. In the construction of a bill or note, the intentionof the parties is to control, if it can be legally ascertained. While the writing may be read in the light ofsurrounding circumstance 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 toascertain, not what the parties may have secretly intended as contradistinguished from what theirwords express, but what is the meaning of the words they have used. What the parties meant must bedetermined by what they said.

Thus, the transfer of the instrument from Philfinance to TRB was merely an assignment, and is notgoverned 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?

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 itacquired the instrument from Filriters fictitiously. Although the deed of assignment stated that thetransfer 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 anyconsideration, the assignment made is a complete nullity.

What is more, We find that the transfer made by Filriters to Philfinance did not conform to Central BankCircular No. 769, series of 1980, otherwise known as the "Rules and Regulations Governing Central BankCertificates of Indebtedness", under which the note was issued. Published in the Official Gazette onNovember 19, 1980, Section 3 thereof provides that any assignment of registered certificates shall notbe valid unless made . . . by the registered owner thereof in person or by his representative dulyauthorized in writing.

In the case at bar, Alfredo O. Banaria, who signed the deed of assignment purportedly for and on behalfof Filriters, did not have the necessary written authorization from the Board of Directors of Filriters toact for the latter. For lack of such authority, the assignment did not therefore bind Filriters and violatedat the same time Central Bank Circular No. 769 which has the force and effect of a law, resulting in thenullity of the transfer (People vs. Que Po Lay, 94 Phil. 640; 3M Philippines, Inc. vs. Commissioner ofInternal Revenue, 165 SCRA 778).

In sum, Philfinance acquired no title or rights under CBCI No. D891 which it could assign or transfer toTraders Royal Bank and which the latter can register with the Central Bank

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

Says the petitioner;

Since Philfinance own 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 paymentto Philfinance for the CBCI purchased by it could just as well be considered a payment to Filriters, theregistered owner of the CBCI as to bar the latter from claiming, as it has, that it never received anypayment for that CBCI sold and that said CBCI was sold without its authority.

xxx xxx xxx

We respectfully submit that, considering that the Court of Appeals has held that the CBCI was merelyborrowed by Philfinance from Filriters, a sister corporation, to guarantee its (Philfinance's) financingoperations, if it were to be consistent therewith, on the issued raised by TRB that there was a piercing aveil of corporate entity, the Court of Appeals should have ruled that such veil of corporate entity was, infact, pierced, and the payment by TRB to Philfinance should be construed as payment to Filriters. 17

We disagree with Petitioner.

Petitioner cannot put up the excuse of piercing the veil of corporate entity, as this merely an equitableremedy, and may be awarded only in cases when the corporate fiction is used to defeat publicconvenience, justify wrong, protect fraud or defend crime or where a corporation is a mere alter ego orbusiness conduit of a person. 18



Peiercing the veil of corporate entity requires the court to see through the protective shroud whichexempts its stockholders from liabilities that ordinarily, they could be subject to, or distinguished onecorporation 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, orcrime was committed upon another, disregarding, thus, his, her, or its rights. It is the protection of theinterests of innocent third persons dealing with the corporate entity which the law aims to protect bythis doctrine.

The corporate separateness between Filriters and Philfinance remains, despite the petitioners insistenceon the contrary. For one, other than the allegation that Filriters is 90% owned by Philfinance, and theidentity of one shall be maintained as to the other, there is nothing else which could lead the courtunder circumstance 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, 19in the absence of such grounds, the general rule must upheld. The fact that Filfinance owns majorityshares 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 byanother corporation of all or nearly all of the capital stock of a corporation is not of itself a sufficientreason for disregarding the fiction of separate corporate personalities.

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

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

certificate.

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 officeof the Bank or any agency duly authorized by the Bank, and such registration is noted hereon. After suchregistration no transfer thereof shall be valid unless made at said office (where the Certificates has beenregistered) by the registered owner hereof, in person, or by his attorney, duly authorized in writing andsimilarly noted hereon and upon payment of a nominal transfer fee which may be required, a newCertificate shall be issued to the transferee of the registered owner thereof. The bank or any agencyduly authorized by the Bank may deem and treat the bearer of this Certificate, or if this Certificate isregistered 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 otherpurpose whether or not this Certificate shall be overdue.

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



Petitioner knew that Philfinance is not registered owner of the 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 toverify of inquire as to the title Philfinance to dispose to the CBCI.

Moreover, CBCI No. D891 is governed by CB Circular No. 769, series of 1990 21, known as the Rules andRegulations Governing Central Bank Certificates of Indebtedness, Section 3, Article V of which providesthat:

Sec. 3. Assignment of Registered Certificates. — Assignment of registered certificates shall not be validunless made at the office where the same have been issued and registered or at the Securities ServicingDepartment, Central Bank of the Philippines, and by the registered owner thereof, in person or by hisrepresentative, duly authorized in writing. For this purpose, the transferee may be designated as therepresentative of the registered owner.

Petitioner, being a commercial bank, cannot feign ignorance of Central Bank Circular 769, and itsrequirements. An entity which deals with corporate agents within circumstances showing that theagents 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

The transfer made by Filriters to Philfinance did not conform to the said. Central Bank Circular, which forall intents, is considered part of the law. As found by the courts a quo, Alfredo O. Banaria, who hadsigned the deed of assignment from Filriters to Philfinance, purportedly for and in favor of Filriters, didnot 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 therewas no consideration for the same. This is fatal to the petitioner's cause, for then, Philfinance had notitle over the subject certificate to convey the Traders Royal Bank. Nemo potest nisi quod de jure potest— no man can do anything except what he can do lawfully.

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.

Q Do you know this Central Bank Certificate of Indebtedness, in short, CBCI No. D891 in the facevalue of P5000,000.00 subject of this case?

A Yes, sir.

Q Why do you know this?

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

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

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



Q Legal reserve for the purpose of what?

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

It cannot, therefore, be taken out of the said funds, without violating the requirements of the law. Thus,the anauthorized use or distribution of the same by a corporate officer of Filriters cannot bind the saidcorporation, not without the approval of its Board of Directors, and the maintenance of the requiredreserve fund.

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

ACCORDINGLY, the petition is DISMISSED and the decision appealed from dated January 29, 1990 is

hereby AFFIRMED.

SO ORDERED.

Regalado, Romero and Mendoza, JJ., concur.

Puno, J., took no part.

Garcia v. Llamas

FIRST DIVISION

[G.R. No. 154127. December 8, 2003]

ROMEO C. GARCIA, petitioner, vs. DIONISIO V. LLAMAS, respondent.D E C I S I O NPANGANIBAN, J.:

Novation cannot be presumed. It must be clearly shown either by the express assent of the parties or bythe complete incompatibility between the old and the new agreements. Petitioner herein fails to showeither requirement convincingly; hence, the summary judgment holding him liable as a joint and solidarydebtor stands.

The Case

Before us is a Petition for Review[1] under Rule 45 of the Rules of Court, seeking to nullify the November26, 2001 Decision[2] and the June 26, 2002 Resolution[3] of the Court of Appeals (CA) in CA-GR CV No.60521. The appellate court disposed as follows:

“UPON THE VIEW WE TAKE OF THIS CASE, THUS, the judgment appealed from, insofar as it pertains to

[Petitioner] Romeo Garcia, must be, as it hereby is, AFFIRMED, subject to the modification that theaward for attorney’s fees and cost of suit is DELETED. The portion of the judgment that pertains to x x x



Eduardo de Jesus is SET ASIDE and VACATED. Accordingly, the case against x x x Eduardo de Jesus isREMANDED to the court of origin for purposes of receiving ex parte *Respondent+ Dionisio Llamas’

evidence against x x x Eduardo de Jesus.”*4+

The challenged Resolution, on the other hand, denied petitioner’s Motion for Reconsideration.

The Antecedents

The antecedents of the case are narrated by the CA as follows:

“This case started out as a complaint for sum of money and damages by x x x *Respondent+ Dionisio

Llamas against x x x [Petitioner] Romeo Garcia and Eduardo de Jesus. Docketed as Civil Case No. Q97-32-873, the complaint alleged that on 23 December 1996[,] [petitioner and de Jesus] borrowedP400,000.00 from [respondent]; that, on the same day, [they] executed a promissory note wherein theybound themselves jointly and severally to pay the loan on or before 23 January 1997 with a 5% interestper month; that the loan has long been overdue and, despite repeated demands, [petitioner and deJesus] have failed and refused to pay it; and that, by reason of the[ir] unjustified refusal, [respondent]

was compelled to engage the services of counsel to whom he agreed to pay 25% of the sum to berecovered from [petitioner and de Jesus], plus P2,000.00 for every appearance in court. Annexed to thecomplaint were the promissory note above-mentioned and a demand letter, dated 02 May 1997, by[respondent] addressed to [petitioner and de Jesus].

“Resisting the complaint, *Petitioner Garcia,+ in his *Answer,+ averred that he assumed no liability under

the promissory note because he signed it merely as an accommodation party for x x x de Jesus; and,alternatively, that he is relieved from any liability arising from the note inasmuch as the loan had beenpaid by x x x de Jesus by means of a check dated 17 April 1997; and that, in any event, the issuance ofthe check and *respondent’s+ acceptance thereof novated or superseded the note.

“*Respondent+ tendered a reply to *Petitioner+ Garcia’s answer, thereunder asserting that the loanremained unpaid for the reason that the check issued by x x x de Jesus bounced, and that [Petitioner]Garcia’s answer was not even accompanied by a certificate of non-forum shopping. Annexed to thereply were the face of the check and the reverse side thereof.

“For his part, x x x de Jesus asserted in his *A+nswer with [C]ounterclaim that out of the supposedP400,000.00 loan, he received only P360,000.00, the P40,000.00 having been advance interest thereonfor two months, that is, for January and February 1997; that[,] in fact[,] he paid the sum of P120,000.00by way of interests; that this was made when *respondent’s+ daughter, one Nits Llamas-Quijencio,received from the Central Police District Command at Bicutan, Taguig, Metro Manila (where x x x deJesus worked), the sum of P40,000.00, representing the peso equivalent of his accumulated leavecredits, another P40,000.00 as advance interest, and still another P40,000.00 as interest for the months

of March and April 1997; that he had difficulty in paying the loan and had asked [respondent] for anextension of time; that [respondent] acted in bad faith in instituting the case, [respondent] havingagreed to accept the benefits he (de Jesus) would receive for his retirement, but [respondent]nonetheless filed the instant case while his retirement was being processed; and that, in defense of hisrights, he agreed to pay his counsel P20,000.00 *as+ attorney’s fees, plus P1,000.00 for every court

appearance.



“During the pre-trial conference, x x x de Jesus and his lawyer did not appear, nor did they file any pre-trial brief. Neither did [Petitioner] Garcia file a pre-trial brief, and his counsel even manifested that hewould no [longer] present evidence. Given this development, the trial court gave [respondent]permission to present his evidence ex parte against x x x de Jesus; and, as regards [Petitioner] Garcia,the trial court directed [respondent] to file a motion for judgment on the pleadings, and for [Petitioner]Garcia to file his comment or opposition thereto.

“Instead, *respondent+ filed a *M+otion to declare *Petitioner] Garcia in default and to allow him topresent his evidence ex parte. Meanwhile, [Petitioner] Garcia filed a [M]anifestation submitting hisdefense to a judgment on the pleadings. Subsequently, [respondent] filed a [M]anifestation/[M]otion tosubmit the case for judgement on the pleadings, withdrawing in the process his previous motion.Thereunder, he asserted that *petitioner’s and de Jesus’+ solidary liability under the promissory note

cannot be any clearer, and that the check issued by de Jesus did not discharge the loan since the checkbounced.”*5+

On July 7, 1998, the Regional Trial Court (RTC) of Quezon City (Branch 222) disposed of the case asfollows:

“WHEREFORE, premises considered, judgment on the pleadings is hereby rendered in favor of[respondent] and against [petitioner and De Jesus], who are hereby ordered to pay, jointly and severally,the [respondent] the following sums, to wit:

‘1) P400,000.00 representing the principal amount plus 5% interest thereon per month from

January 23, 1997 until the same shall have been fully paid, less the amount of P120,000.00 representinginterests already paid by x x x de Jesus;

‘2) P100,000.00 as attorney’s fees plus appearance fee of P2,000.00 for each day of *c+ourt

appearance, and;

‘3) Cost of this suit.’”*6+

Ruling of the Court of Appeals

The CA ruled that the trial court had erred when it rendered a judgment on the pleadings against DeJesus. According to the appellate court, his Answer raised genuinely contentious issues. Moreover, hewas still required to present his evidence ex parte. Thus, respondent was not ipso facto entitled to theRTC judgment, even though De Jesus had been declared in default. The case against the latter wastherefore remanded by the CA to the trial court for the ex parte reception of the former’s evidence.

As to petitioner, the CA treated his case as a summary judgment, because his Answer had failed to raise

even a single genuine issue regarding any material fact.

The appellate court ruled that no novation -- express or implied -- had taken place when respondentaccepted the check from De Jesus. According to the CA, the check was issued precisely to pay for theloan that was covered by the promissory note jointly and severally undertaken by petitioner and DeJesus. Respondent’s acceptance of the check did not serve to make De Jesus the sole debtor because,

first, the obligation incurred by him and petitioner was joint and several; and, second, the check -- whichhad been intended to extinguish the obligation -- bounced upon its presentment.



Hence, this Petition.[7]

Issues

Petitioner submits the following issues for our consideration:

“I

Whether or not the Honorable Court of Appeals gravely erred in not holding that novation applies in theinstant case as x x x Eduardo de Jesus had expressly assumed sole and exclusive liability for the loanobligation he obtained from x x x Respondent Dionisio Llamas, as clearly evidenced by:

a) Issuance by x x x de Jesus of a check in payment of the full amount of the loan of P400,000.00 infavor of Respondent Llamas, although the check subsequently bounced[;]

b) Acceptance of the check by the x x x respondent x x x which resulted in [the] substitution by x x

x de Jesus or [the superseding of] the promissory note;

c) x x x de Jesus having paid interests on the loan in the total amount of P120,000.00;

d) The fact that Respondent Llamas agreed to the proposal of x x x de Jesus that due to financialdifficulties, he be given an extension of time to pay his loan obligation and that his retirement benefitsfrom the Philippine National Police will answer for said obligation.

“II

Whether or not the Honorable Court of Appeals seriously erred in not holding that the defense of

petitioner that he was merely an accommodation party, despite the fact that the promissory noteprovided for a joint and solidary liability, should have been given weight and credence considering thatsubsequent events showed that the principal obligor was in truth and in fact x x x de Jesus, as evidencedby the foregoing circumstances showing his assumption of sole liability over the loan obligation.

“III

Whether or not judgment on the pleadings or summary judgment was properly availed of byRespondent Llamas, despite the fact that there are genuine issues of fact, which the Honorable Court ofAppeals itself admitted in its Decision, which call for the presentation of evidence in a full-blowntrial.”*8+

Simply put, the issues are the following: 1) whether there was novation of the obligation; 2) whether thedefense that petitioner was only an accommodation party had any basis; and 3) whether the judgmentagainst him -- be it a judgment on the pleadings or a summary judgment -- was proper.

The Court’s Ruling

The Petition has no merit.



First Issue:Novation

Petitioner seeks to extricate himself from his obligation as joint and solidary debtor by insisting thatnovation took place, either through the substitution of De Jesus as sole debtor or the replacement of thepromissory note by the check. Alternatively, the former argues that the original obligation wasextinguished when the latter, who was his co-obligor, “paid” the loan with the check.

The fallacy of the second (alternative) argument is all too apparent. The check could not haveextinguished the obligation, because it bounced upon presentment. By law,[9] the delivery of a checkproduces the effect of payment only when it is encashed.

We now come to the main issue of whether novation took place.

Novation is a mode of extinguishing an obligation by changing its objects or principal obligations, bysubstituting a new debtor in place of the old one, or by subrogating a third person to the rights of thecreditor.[10] Article 1293 of the Civil Code defines novation as follows:

“Art. 1293. Novation which consists in substituting a new debtor in the place of the original one, may be

made even without the knowledge or against the will of the latter, but not without the consent of thecreditor. Payment by the new debtor gives him rights mentioned in articles 1236 and 1237.”

In general, there are two modes of substituting the person of the debtor: (1) expromision and (2)delegacion. In expromision, the initiative for the change does not come from -- and may even be madewithout the knowledge of -- the debtor, since it consists of a third person’s assumption of the obligation.

As such, it logically requires the consent of the third person and the creditor. In delegacion, the debtoroffers, and the creditor accepts, a third person who consents to the substitution and assumes theobligation; thus, the consent of these three persons are necessary.[11] Both modes of substitution by

the debtor require the consent of the creditor.[12]

Novation may also be extinctive or modificatory. It is extinctive when an old obligation is terminated bythe creation of a new one that takes the place of the former. It is merely modificatory when the oldobligation subsists to the extent that it remains compatible with the amendatory agreement.[13]Whether extinctive or modificatory, novation is made either by changing the object or the principalconditions, referred to as objective or real novation; or by substituting the person of the debtor orsubrogating a third person to the rights of the creditor, an act known as subjective or personalnovation.[14] For novation to take place, the following requisites must concur:

1) There must be a previous valid obligation.

2) The parties concerned must agree to a new contract.

3) The old contract must be extinguished.

4) There must be a valid new contract.[15]

Novation may also be express or implied. It is express when the new obligation declares in unequivocalterms that the old obligation is extinguished. It is implied when the new obligation is incompatible with



the old one on every point.[16] The test of incompatibility is whether the two obligations can standtogether, each one with its own independent existence.[17]

Applying the foregoing to the instant case, we hold that no novation took place.

The parties did not unequivocally declare that the old obligation had been extinguished by the issuanceand the acceptance of the check, or that the check would take the place of the note. There is noincompatibility between the promissory note and the check. As the CA correctly observed, the checkhad been issued precisely to answer for the obligation. On the one hand, the note evidences the loanobligation; and on the other, the check answers for it. Verily, the two can stand together.

Neither could the payment of interests -- which, in petitioner’s view, also constitutes novation*18+ --change the terms and conditions of the obligation. Such payment was already provided for in thepromissory note and, like the check, was totally in accord with the terms thereof.

Also unmeritorious is petitioner’s argument that the obligation was novated by the substitution ofdebtors. In order to change the person of the debtor, the old one must be expressly released from the

obligation, and the third person or new debtor must assume the former’s place in the relation.*19+ Well-settled is the rule that novation is never presumed.[20] Consequently, that which arises from apurported change in the person of the debtor must be clear and express.[21] It is thus incumbent onpetitioner to show clearly and unequivocally that novation has indeed taken place.

In the present case, petitioner has not shown that he was expressly released from the obligation, that athird person was substituted in his place, or that the joint and solidary obligation was cancelled andsubstituted by the solitary undertaking of De Jesus. The CA aptly held:

“x x x. Plaintiff’s acceptance of the bum check did not result in substitution by de Jesus either, the nature

of the obligation being solidary due to the fact that the promissory note expressly declared that the

liability of appellants thereunder is joint and [solidary.] Reason: under the law, a creditor may demandpayment or performance from one of the solidary debtors or some or all of them simultaneously, andpayment made by one of them extinguishes the obligation. It therefore follows that in case the creditorfails to collect from one of the solidary debtors, he may still proceed against the other or others. x x x”*22+

Moreover, it must be noted that for novation to be valid and legal, the law requires that the creditorexpressly consent to the substitution of a new debtor.[23] Since novation implies a waiver of the rightthe creditor had before the novation, such waiver must be express.[24] It cannot be supposed, withoutclear proof, that the present respondent has done away with his right to exact fulfillment from either ofthe solidary debtors.[25]

More important, De Jesus was not a third person to the obligation. From the beginning, he was a jointand solidary obligor of the P400,000 loan; thus, he can be released from it only upon its extinguishment.Respondent’s acceptance of his check did not change the person of the debtor, because a joint and

solidary obligor is required to pay the entirety of the obligation.

It must be noted that in a solidary obligation, the creditor is entitled to demand the satisfaction of thewhole obligation from any or all of the debtors.[26] It is up to the former to determine against whom to



enforce collection.[27] Having made himself jointly and severally liable with De Jesus, petitioner istherefore liable[28] for the entire obligation.[29]

Second Issue:Accommodation Party

Petitioner avers that he signed the promissory note merely as an accommodation party; and that, assuch, he was released as obligor when respondent agreed to extend the term of the obligation.

This reasoning is misplaced, because the note herein is not a negotiable instrument. The note reads:

“PROMISSORY NOTE

“P400,000.00

“RECEIVED FROM ATTY. DIONISIO V. LLAMAS, the sum of FOUR HUNDRED THOUSAND PESOS, Philippine

Currency payable on or before January 23, 1997 at No. 144 K-10 St. Kamias, Quezon City, with interest at

the rate of 5% per month or fraction thereof.

“It is understood that our liability under this loan is jointly and severally [sic].

“Done at Quezon City, Metro Manila this 23rd day of December, 1996.”*30+

By its terms, the note was made payable to a specific person rather than to bearer or to order[31] -- arequisite for negotiability under Act 2031, the Negotiable Instruments Law (NIL). Hence, petitionercannot avail himself of the NIL’s provisions on the liabilities and defenses of an accommodation party.

Besides, a non-negotiable note is merely a simple contract in writing and is evidence of such intangiblerights as may have been created by the assent of the parties.[32] The promissory note is thus covered

by the general provisions of the Civil Code, not by the NIL.

Even granting arguendo that the NIL was applicable, still, petitioner would be liable for the promissorynote. Under Article 29 of Act 2031, an accommodation party is liable for the instrument to a holder forvalue even if, at the time of its taking, the latter knew the former to be only an accommodation party.The relation between an accommodation party and the party accommodated is, in effect, one ofprincipal and surety -- the accommodation party being the surety.[33] It is a settled rule that a surety isbound equally and absolutely with the principal and is deemed an original promissor and debtor fromthe beginning. The liability is immediate and direct.[34]

Third Issue:Propriety of Summary Judgment

or Judgment on the Pleadings

The next issue illustrates the usual confusion between a judgment on the pleadings and a summary judgment. Under Section 3 of Rule 35 of the Rules of Court, a summary judgment may be rendered aftera summary hearing if the pleadings, supporting affidavits, depositions and admissions on file show that(1) except as to the amount of damages, there is no genuine issue regarding any material fact; and (2)the moving party is entitled to a judgment as a matter of law.



A summary judgment is a procedural device designed for the prompt disposition of actions in which thepleadings raise only a legal, not a genuine, issue regarding any material fact.[35] Consequently, facts areasserted in the complaint regarding which there is yet no admission, disavowal or qualification; orspecific denials or affirmative defenses are set forth in the answer, but the issues are fictitious as shownby the pleadings, depositions or admissions.[36] A summary judgment may be applied for by either aclaimant or a defending party.[37]

On the other hand, under Section 1 of Rule 34 of the Rules of Court, a judgment on the pleadings isproper when an answer fails to render an issue or otherwise admits the material allegations of theadverse party’s pleading. The essential question is whether there are issues generated by the

pleadings.[38] A judgment on the pleadings may be sought only by a claimant, who is the party seekingto recover upon a claim, counterclaim or cross-claim; or to obtain a declaratory relief. [39]

Apropos thereto, it must be stressed that the trial court’s judgment against petitioner was correctlytreated by the appellate court as a summary judgment, rather than as a judgment on the pleadings. HisAnswer[40] apparently raised several issues -- that he signed the promissory note allegedly as a mereaccommodation party, and that the obligation was extinguished by either payment or novation.

However, these are not factual issues requiring trial. We quote with approval the CA’s observations:

“Although Garcia’s *A+nswer tendered some issues, by way of affirmative defenses, the documentssubmitted by [respondent] nevertheless clearly showed that the issues so tendered were not validissues. Firstly, Garcia’s claim that he was merely an accommodation party is belied by the promissory

note that he signed. Nothing in the note indicates that he was only an accommodation party as heclaimed to be. Quite the contrary, the promissory note bears the statement: ‘It is understood that our

liability under this loan is jointly and severally *sic+.’ Secondly, his claim that his co-defendant de Jesusalready paid the loan by means of a check collapses in view of the dishonor thereof as shown at thedorsal side of said check.”*41+

From the records, it also appears that petitioner himself moved to submit the case for judgment on thebasis of the pleadings and documents. In a written Manifestation,*42+ he stated that “judgment on the

pleadings may now be rendered without further evidence, considering the allegations and admissions ofthe parties.”*43+

In view of the foregoing, the CA correctly considered as a summary judgment that which the trial courthad issued against petitioner.

WHEREFORE, this Petition is hereby DENIED and the assailed Decision AFFIRMED. Costs againstpetitioner.

SO ORDERED.

Davide, Jr., C.J., (Chairman), Ynares-Santiago, Carpio, and Azcuna, JJ., concur.

Metropolitan Bank and Trust Co. v. Court of Appeals

G.R. No. 88866 February 18, 1991



METROPOLITAN BANK & TRUST COMPANY, petitioner,vs.COURT OF APPEALS, GOLDEN SAVINGS & LOAN ASSOCIATION, INC., LUCIA CASTILLO, MAGNO CASTILLOand GLORIA CASTILLO, respondents.

Angara, Abello, Concepcion, Regala & Cruz for petitioner.

Bengzon, Zarraga, Narciso, Cudala, Pecson & Bengson for Magno and Lucia Castillo.

Agapito S. Fajardo and Jaime M. Cabiles for respondent Golden Savings & Loan Association, Inc.

CRUZ, J.:p

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

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

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

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

More than two weeks after the deposits, Gloria Castillo went to the Calapan branch several times to askwhether the warrants had been cleared. She was told to wait. Accordingly, Gomez was meanwhile notallowed to withdraw from his account. Later, however, "exasperated" over Gloria's repeated inquiriesand also as an accommodation for a "valued client," the petitioner says it finally decided to allow GoldenSavings to withdraw from the proceeds of thewarrants. 3 The first withdrawal was made on July 9, 1979, in the amount of P508,000.00, the second onJuly 13, 1979, in the amount of P310,000.00, and the third on July 16, 1979, in the amount of

P150,000.00. The total withdrawal was P968.000.00. 4

In turn, Golden Savings subsequently allowed Gomez to make withdrawals from his own account,eventually collecting the total amount of P1,167,500.00 from the proceeds of the apparently clearedwarrants. The last withdrawal was made on July 16, 1979.



On July 21, 1979, Metrobank informed Golden Savings that 32 of the warrants had been dishonored bythe Bureau of Treasury on July 19, 1979, and demanded the refund by Golden Savings of the amount ithad previously withdrawn, to make up the deficit in its account.

The demand was rejected. Metrobank then sued Golden Savings in the Regional Trial Court of Mindoro.5 After trial, judgment was rendered in favor of Golden Savings, which, however, filed a motion forreconsideration even as Metrobank filed its notice of appeal. On November 4, 1986, the lower courtmodified its decision thus:

ACCORDINGLY, judgment is hereby rendered:

1. Dismissing the complaint with costs against the plaintiff;

2. Dissolving and lifting the writ of attachment of the properties of defendant Golden Savings andLoan Association, Inc. and defendant Spouses Magno Castillo and Lucia Castillo;

3. Directing the plaintiff to reverse its action of debiting Savings Account No. 2498 of the sum of

P1,754,089.00 and to reinstate and credit to such account such amount existing before the debit wasmade including the amount of P812,033.37 in favor of defendant Golden Savings and Loan Association,Inc. and thereafter, to allow defendant Golden Savings and Loan Association, Inc. to withdraw theamount outstanding thereon before the debit;

4. Ordering the plaintiff to pay the defendant Golden Savings and Loan Association, Inc. attorney'sfees and expenses of litigation in the amount of P200,000.00.

5. Ordering the plaintiff to pay the defendant Spouses Magno Castillo and Lucia Castillo attorney'sfees and expenses of litigation in the amount of P100,000.00.

SO ORDERED.

On appeal to the respondent court, 6 the decision was affirmed, prompting Metrobank to file thispetition for review on the following grounds:

1. Respondent Court of Appeals erred in disregarding and failing to apply the clear contractualterms and conditions on the deposit slips allowing Metrobank to charge back any amount erroneouslycredited.

(a) Metrobank's right to charge back is not limited to instances where the checks or treasurywarrants are forged or unauthorized.

(b) Until such time as Metrobank is actually paid, its obligation is that of a mere collecting agentwhich cannot be held liable for its failure to collect on the warrants.

2. Under the lower court's decision, affirmed by respondent Court of Appeals, Metrobank is madeto pay for warrants already dishonored, thereby perpetuating the fraud committed by Eduardo Gomez.

3. Respondent Court of Appeals erred in not finding that as between Metrobank and GoldenSavings, the latter should bear the loss.



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

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

Doubt may be expressed about the binding force of the conditions, considering that they haveapparently been imposed by the bank unilaterally, without the consent of the depositor. Indeed, it could

be argued that the depositor, in signing the deposit slip, does so only to identify himself and not toagree to the conditions set forth in the given permit at the back of the deposit slip. We do not have torule on this matter at this time. At any rate, the Court feels that even if the deposit slip were considereda contract, the petitioner could still not validly disclaim responsibility thereunder in the light of thecircumstances of this case.

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

Art. 1909. — The agent is responsible not only for fraud, but also for negligence, which shall be judged

'with more or less rigor by the courts, according to whether the agency was or was not for acompensation.

The negligence of Metrobank has been sufficiently established. To repeat for emphasis, it was theclearance given by it that assured Golden Savings it was already safe to allow Gomez to withdraw theproceeds of the treasury warrants he had deposited Metrobank misled Golden Savings. There may havebeen no express clearance, as Metrobank insists (although this is refuted by Golden Savings) but in anycase that clearance could be implied from its allowing Golden Savings to withdraw from its account notonly once or even twice but three times. The total withdrawal was in excess of its original balancebefore the treasury warrants were deposited, which only added to its belief that the treasury warrantshad indeed been cleared.

Metrobank's argument that it may recover the disputed amount if the warrants are not paid for anyreason is not acceptable. Any reason does not mean no reason at all. Otherwise, there would have beenno need at all for Golden Savings to deposit the treasury warrants with it for clearance. There wouldhave been no need for it to wait until the warrants had been cleared before paying the proceeds thereofto Gomez. Such a condition, if interpreted in the way the petitioner suggests, is not binding for beingarbitrary and unconscionable. And it becomes more so in the case at bar when it is considered that thesupposed dishonor of the warrants was not communicated to Golden Savings before it made its ownpayment to Gomez.



The belated notification aggravated the petitioner's earlier negligence in giving express or at leastimplied clearance to the treasury warrants and allowing payments therefrom to Golden Savings. Butthat is not all. On top of this, the supposed reason for the dishonor, to wit, the forgery of the signaturesof the general manager and the auditor of the drawer corporation, has not been established. 9 This wasthe finding of the lower courts which we see no reason to disturb. And as we said in MWSS v. Court ofAppeals: 10

Forgery cannot be presumed (Siasat, et al. v. IAC, et al., 139 SCRA 238). It must be established by clear,positive and convincing evidence. This was not done in the present case.

A no less important consideration is the circumstance that the treasury warrants in question are notnegotiable instruments. Clearly stamped on their face is the word "non-negotiable." Moreover, and thisis of equal significance, it is indicated that they are payable from a particular fund, to wit, Fund 501.

The following sections of the Negotiable Instruments Law, especially the underscored parts, arepertinent:

Sec. 1. — Form of negotiable instruments. — An instrument to be negotiable must conform to thefollowing requirements:

(a) It must be in writing and signed by the maker or drawer;

(b) Must contain an unconditional promise or order to pay a sum certain in money;

(c) Must be payable on demand, or at a fixed or determinable future time;

(d) Must be payable to order or to bearer; and

(e) Where the instrument is addressed to a drawee, he must be named or otherwise indicatedtherein with reasonable certainty.

xxx xxx xxx

Sec. 3. When promise is unconditional. — An unqualified order or promise to pay is unconditionalwithin the meaning of this Act though coupled with —

(a) An indication of a particular fund out of which reimbursement is to be made or a particularaccount to be debited with the amount; or

(b) A statement of the transaction which gives rise to the instrument judgment.

But an order or promise to pay out of a particular fund is not unconditional.

The indication of Fund 501 as the source of the payment to be made on the treasury warrants makes theorder or promise to pay "not unconditional" and the warrants themselves non-negotiable. There shouldbe no question that the exception on Section 3 of the Negotiable Instruments Law is applicable in thecase at bar. This conclusion conforms to Abubakar vs. Auditor General 11 where the Court held:



Narvasa, Gancayco, Griño-Aquino and Medialdea, JJ., concur.

Phil. Education Company Inc. v. Soriano

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

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

Marcial Esposo for plaintiff-appellant.

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

DIZON, J.:

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

On April 18, 1958 Enrique Montinola sought to purchase from the Manila Post Office ten (10) moneyorders of P200.00 each payable to E.P. Montinola withaddress at Lucena, Quezon. After the postal tellerhad made out money ordersnumbered 124685, 124687-124695, Montinola offered to pay for them witha private checks were not generally accepted in payment of money orders, the teller advised him to seethe Chief of the Money Order Division, but instead of doing so, Montinola managed to leave buildingwith his own check and the ten(10) money orders without the knowledge of the teller.

On the same date, April 18, 1958, upon discovery of the disappearance of the unpaid money orders, anurgent message was sent to all postmasters, and the following day notice was likewise served upon allbanks, instructing them not to pay anyone of the money orders aforesaid if presented for payment. TheBank of America received a copy of said notice three days later.

On April 23, 1958 one of the above-mentioned money orders numbered 124688 was received byappellant as part of its sales receipts. The following day it deposited the same with the Bank of America,and one day thereafter the latter cleared it with the Bureau of Posts and received from the latter its facevalue of P200.00.

On September 27, 1961, appellee Mauricio A. Soriano, Chief of the Money Order Division of the Manila

Post Office, acting for and in behalf of his co-appellee, Postmaster Enrico Palomar, notified the Bank ofAmerica that money order No. 124688 attached to his letter had been found to have been irregularlyissued and that, in view thereof, the amount it represented had been deducted from the bank's clearingaccount. For its part, on August 2 of the same year, the Bank of America debited appellant's accountwith the same amount and gave it advice thereof by means of a debit memo.

On October 12, 1961 appellant requested the Postmaster General to reconsider the action taken by hisoffice deducting the sum of P200.00 from the clearing account of the Bank of America, but his request



was denied. So was appellant's subsequent request that the matter be referred to the Secretary ofJustice for advice. Thereafter, appellant elevated the matter to the Secretary of Public Works andCommunications, but the latter sustained the actions taken by the postal officers.

In connection with the events set forth above, Montinola was charged with theft in the Court of FirstInstance of Manila (Criminal Case No. 43866) but after trial he was acquitted on the ground ofreasonable doubt.

On January 8, 1962 appellant filed an action against appellees in the Municipal Court of Manila prayingfor judgment as follows:

WHEREFORE, plaintiff prays that after hearing defendants be ordered:

(a) To countermand the notice given to the Bank of America on September 27, 1961, deductingfrom the said Bank's clearing account the sum of P200.00 represented by postal money order No.124688, or in the alternative indemnify the plaintiff in the same amount with interest at 8-½% perannum from September 27, 1961, which is the rate of interest being paid by plaintiff on its overdraft

account;

(b) To pay to the plaintiff out of their own personal funds, jointly and severally, actual and moraldamages in the amount of P1,000.00 or in such amount as will be proved and/or determined by thisHonorable Court: exemplary damages in the amount of P1,000.00, attorney's fees of P1,000.00, and thecosts of action.

Plaintiff also prays for such other and further relief as may be deemed just and equitable.

On November 17, 1962, after the parties had submitted the stipulation of facts reproduced at pages 12to 15 of the Record on Appeal, the above-named court rendered judgment as follows:

WHEREFORE, judgment is hereby rendered, ordering the defendants to countermand the notice given tothe Bank of America on September 27, 1961, deducting from said Bank's clearing account the sum ofP200.00 representing the amount of postal money order No. 124688, or in the alternative, to indemnifythe plaintiff in the said sum of P200.00 with interest thereon at the rate of 8-½% per annum fromSeptember 27, 1961 until fully paid; without any pronouncement as to cost and attorney's fees.

The case was appealed to the Court of First Instance of Manila where, after the parties had resubmittedthe same stipulation of facts, the appealed decision dismissing the complaint, with costs, was rendered.

The first, second and fifth assignments of error discussed in appellant's brief are related to the other andwill therefore be discussed jointly. They raise this main issue: that the postal money order in question is

a negotiable instrument; that its nature as such is not in anyway affected by the letter dated October 26,1948 signed by the Director of Posts and addressed to all banks with a clearing account with the PostOffice, and that money orders, once issued, create a contractual relationship of debtor and creditor,respectively, between the government, on the one hand, and the remitters payees or endorses, on theother.

It is not disputed that our postal statutes were patterned after statutes in force in the United States. Forthis reason, ours are generally construed in accordance with the construction given in the United States



to their own postal statutes, in the absence of any special reason justifying a departure from this policyor practice. The weight of authority in the United States is that postal money orders are not negotiableinstruments (Bolognesi vs. U.S. 189 Fed. 395; U.S. vs. Stock Drawers National Bank, 30 Fed. 912), thereason behind this rule being that, in establishing and operating a postal money order system, thegovernment is not engaging in commercial transactions but merely exercises a governmental power forthe public benefit.

It is to be noted in this connection that some of the restrictions imposed upon money orders by postallaws and regulations are inconsistent with the character of negotiable instruments. For instance, suchlaws and regulations usually provide for not more than one endorsement; payment of money ordersmay be withheld under a variety of circumstances (49 C.J. 1153).

Of particular application to the postal money order in question are the conditions laid down in the letterof the Director of Posts of October 26, 1948 (Exhibit 3) to the Bank of America for the redemption ofpostal money orders received by it from its depositors. Among others, the condition is imposed that "incases of adverse claim, the money order or money orders involved will be returned to you (the bank)and the, corresponding amount will have to be refunded to the Postmaster, Manila, who reserves the

right to deduct the value thereof from any amount due you if such step is deemed necessary." Theconditions thus imposed in order to enable the bank to continue enjoying the facilities theretoforeenjoyed by its depositors, were accepted by the Bank of America. The latter is therefore bound by them.That it is so is clearly referred from the fact that, upon receiving advice that the amount represented bythe money order in question had been deducted from its clearing account with the Manila Post Office, itdid not file any protest against such action.

Moreover, not being a party to the understanding existing between the postal officers, on the one hand,and the Bank of America, on the other, appellant has no right to assail the terms and conditions thereofon the ground that the letter setting forth the terms and conditions aforesaid is void because it was notissued by a Department Head in accordance with Sec. 79 (B) of the Revised Administrative Code. In

reality, however, said legal provision does not apply to the letter in question because it does not providefor a department regulation but merely sets down certain conditions upon the privilege granted to theBank of Amrica to accept and pay postal money orders presented for payment at the Manila Post Office.Such being the case, it is clear that the Director of Posts had ample authority to issue it pursuant to Sec.1190 of the Revised Administrative Code.

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

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

Concepcion, C.J., Reyes, J.B.L., Makalintal, Zaldivar, Fernando, Teehankee, Barredo and Villamor, JJ.,concur.

Castro and Makasiar, JJ., took no part.



Republic v. Sandiganbayan

EN BANC[G. R. No. 107789. April 30, 2003]

REPUBLIC OF THE PHILIPPINES (PRESIDENTIAL COMMISSION ON GOOD GOVERNMENT), petitioner, vs.THE HONORABLE SANDIGANBAYAN (THIRD DIVISION) and VICTOR AFRICA, respondents.EROCOM INVESTORS AND MANAGERS, INC., BENITO NIETO, CARLOS NIETO, MANUEL NIETO III, RAMONNIETO, ROSARIO ARELLANO, VICTORIA LEGARDA, ANGELA LOBREGAT, MA. RITA DE LOS REYES, CARMENTUAZON and RAFAEL VALDEZ, intervenors.[G. R. No. 147214. April 30, 2003]

VICTOR AFRICA, petitioner, vs. THE HONORABLE SANDIGANBAYAN and THE PRESIDENTIAL COMMISSIONON GOOD GOVERNMENT, respondents.R E S O L U T I O NCARPIO-MORALES, J.:

These consolidated cases, the first for Certiorari, Mandamus and Prohibition, and the second “for

Review on Certiorari” although it is actually one for Certiorari, stem from a Resolution of November 13,1992 issued by the Sandiganbayan in Civil Case No. 0130,[1] on motion of Victor Africa (Africa) whoprayed that said court order the “calling and holding of the Eastern Telecommunications, Philippines,

Inc. (ETPI) annual stockholders meeting for 1992 under the *c+ourt’s control and supervision and

prescribed guidelines.”

It is gathered that on August 7, 1991, the Presidential Commission on Good Government (PCGG)

conducted an ETPI stockholders meeting during which a PCGG controlled board of directors was elected.A special stockholders meeting was later convened by the registered ETPI stockholders wherein anotherset of board of directors was elected, as a result of which two sets of such board and officers wereelected.

Africa, a stockholder of ETPI, alleging that the PCGG had since January 29, 1988 been “i llegally‘exercising’ the rights of stockholders of ETPI,”*2+ especially in the election of the members of the board

of directors, filed the above-said motion before the Sandiganbayan.

The PCGG did not object to Africa’s motion provided that:

1. An Order be issued upholding the right of PCGG to vote all the Class “A” shares of ETPI.

2. In the alternative, in the remote event that PCGG’s right to vote the sequestered shares be not

upheld, an Order be issued:

a. Disregarding the Stock and Transfer Book and Booklet of Stock Certificates of ETPI indetermining who can vote the shares in an Annual Stockholders Meeting of ETPI,

b. Allowing PCGG to vote twenty-three and 90/100 percent (23.9%) of the total subscription inETPI, and



c. Directing the amendment of the Articles of Incorporation and By-laws of ETPI providing for theminimum safeguards for the conservation of assets x x x prior to the calling of a stockholdersmeeting.[3]

By the assailed Resolution of November 13, 1992,*4+ the Sandiganbayan resolved Africa’s motion, the

dispositive portion of which reads:

WHEREFORE, it is ordered that an annual stockholders meeting of the Eastern Telecommunications,Philippines, Inc. (ETPI), for 1992 be held on Friday, November 27 , 1992, at 2:00 o’clock in the afternoon,

at the ETPI Board Room, Telecoms Plaza, 7th Floor, 316 Gil J. Puyat Avenue, Makati, Metro Manila. TheExecutive Clerk of Court of this Division shall issue the call and notice of annual stockholders meeting ofETPI addressed to all the duly registered/recorded stockholders of ETPI. The stockholders meeting shallbe conducted under the supervision and control of this Court, through Mr. Justice Sabino R. de Leon, Jr.In accordance with the Supreme Court ruling in Cojuangco et al vs. Azcuna, et al., supra, only theregistered owners, their duly authorized representatives or their proxies may vote their correspondingshares.

The following minimum safeguards must be set in place and carefully maintained until final judicialresolution of the question of whether or not the sequestered shares of stock (or in a proper case theunderlying assets of the corporation concerned) constitute ill-gotten wealth:

“a. An independent comptroller must be appointed by the Board of Directors upon nomination of thePCGG as conservator. The comptroller shall not be removable (nor shall his position be abolished or hiscompensation changed) without the consent of the conservator. The comptroller shall, in addition to hisother functions as such, have charge of internal audit.

b. The corporate secretary must be acceptable to the conservator. If the corporate secretary ceasesto be acceptable to the conservator, a new one must be appointed by the Board of Directors upon

nomination of the conservator.

c. The external auditors of the corporation must be independent and must be acceptable to theconservator. The independent external auditors shall not be changed without the consent of theconservator.

d. The conservator must be represented in the Board of Directors and in the Executive (orequivalent) and Audit Committees of the corporation involved and of its majority-owned subsidiaries oraffiliates. The representative of the conservator must be a full director (not merely an honorary or ex-officio director) with the right to vote and all other rights and duties of a member of the Board ofDirectors under the Corporation Code. The conservator’s representative shall not be removed from the

Board of Directors (or the mentioned Committees) without the consent of the conservator. The

conservator shall, however, have the right to remove and change its representative at any time, and thenew representative shall be promptly elected to the Board and its mentioned Committees.

e. All transactions involving the disbursement of corporate funds in excess of P5 million must havethe prior approval of the director representing the conservator, in order to be valid and effective.



f. The incurring of debt by the corporation, whether in the form of bonds, debentures, commercialpaper or any other form, in excess of P5 million, must have the prior approval of the directorrepresenting the conservator, in order to be valid and effective.

g. The disposition of a substantial part of assets of the corporation (substantial meaning in excess ofP5 million) shall require the prior approval of the director representing the conservator, in order to bevalid and effective.

h. The above safeguards must be written into the articles of incorporation and by-laws of thecompany involved. In other words, the articles of incorporation and by-laws of the company must beamended so as to incorporate the above safeguards.

i. Any amendment of the articles of incorporation or by-laws of the company that will modify in anyway any of the above safeguards, shall need the prior approval of the director representing theconservator.”

SO ORDERED.[5] (Underscoring supplied)

Assailing the foregoing resolution, the PCGG filed before this Court the herein first petition, docketed asG. R. No. 107789, anchored upon the following grounds:

I

RESPONDENT SANDIGANBAYAN ACTED WITH GRAVE ABUSE OF DISCRETION IN RULING THAT THEREGISTERED STOCKHOLDERS OF ETPI HAD THE RIGHT TO VOTE IN SPITE OF (A) THE RULING OF THISHONORABLE COURT IN PCGG V. SEC AND AFRICA (G. R. NO. 82188) AND (B) A CLEAR SHOWING THATETPI’S STOCK AND TRANSFER BOOK WAS ALTERED AND CANNOT BE USED AS THE BASIS TO DETERMINE

WHO CAN VOTE IN A STOCKHOLDERS’ MEETING.

II

RESPONDENT SANDIGANBAYAN GRAVELY ABUSED ITS DISCRETION AND EXCEEDED ITS JURISDICTIONWHEN IT HELD THAT PCGG CANNOT VOTE AT LEAST 23.9% OF THE OUTSTANDING CAPITAL STOCK OFETPI.

III

WITHOUT DUE CARE AND IN RECKLESS DISREGARD OF THE INTERESTS OF THE REPUBLIC, RESPONDENTSANDIGANBAYAN GRAVELY ABUSED ITS DISCRETION IN ORDERING THE HOLDING OF A STOCKHOLDERS’

MEETING IN ETPI WITHOUT FIRST SETTING IN PLACE – BY AMENDING THE ARTICLES AND BY-LAWS OF

ETPI TO INCORPORATE – THE SAFEGUARDS PRESCRIBED BY THIS HONORABLE COURT IN COJUANGCO V.ROXAS.

IV

THE SANDIGANBAYAN ACTED IN EXCESS OF ITS AUTHORITY AND/OR WITH GRAVE ABUSE OFDISCRETION IN APPOINTING (A) ITS OWN DIVISION CLERK OF COURT TO PERFORM THE DUTIES OF A



By Resolution of February 16, 2001, the Sandiganbayan finally resolved to deny the motions forreconsideration of its Resolution of December 13, 1996, prompting Africa to file on April 6, 2001 beforethis Court the herein second petition,[12] docketed as G. R. No. 147214, challenging the SandiganbayanResolutions of December 13, 1996 (authorizing the holding of a stockholders meeting to incr ease ETPI’s

authorized capital stock and to vote therein the sequestered Class “A” shares of stock) and February 16,

2001 (denying reconsideration of the December 13, 1996 Resolution).

In his petition in G. R. No. 147214, Africa alleged that the Sandiganbayan committed “grave abuse of

discretion” when, by the assailed Resolutions,

a. IT DID NOT ACKNOWLEDGE THE NON-SEQUESTERED STATUS OF THE SHARES *OF “SMALL

STOCHHOLDERS” OF WHICH HE IS ONE AND AEROCOM AND POLYGON+ AND/OR OWNERS THEREOF*;+

[AND]

b. IT DID NOT ACCORD TO THE NON-SEQUESTERED SHARES/OWNERS THE RIGHTS APPURTENANT TOA STOCKHOLDER[.]

He thus prayed that this Court set aside the questioned Resolutions permitting the PCGG to vote thenon-sequestered ETPI Class “A” shares and nullify the votes the PCGG had cast in the stockholdersmeeting held on March 17, 1997.

By Resolution of February 24, 2003,[13] this Court ordered the consolidation of G. R. No. 147214 with G.R. No. 107789, now the subject of the present Resolution.

I

The first issue to be resolved is whether the PCGG can vote the sequestered ETPI Class “A” shares in the

stockholders meeting for the election of the board of directors. The leading case on the matter is

Bataan Shipyard & Engineering Co., Inc. v. Presidential Commission on Good Government[14] where thisCourt defined the powers of the PCGG as follows:

a. PCGG May Not Exercise Acts of Ownership

One thing is certain, and should be stated at the outset: the PCGG cannot exercise acts of dominion overproperty sequestered, frozen or provisionally taken over. As already earlier stressed with no littleinsistence, the act of sequestration[,] freezing or provisional takeover of property does not import orbring about a divestment of title over said property; [it] does not make the PCGG the owner thereof. Inrelation to the property sequestered, frozen or provisionally taken over, the PCGG is a conservator, notan owner. Therefore, it can not perform acts of strict ownership; and this is specially true in thesituations contemplated by the sequestration rules where, unlike cases of receivership, for example, no

court exercises effective supervision or can upon due application and hearing, grant authority for theperformance of acts of dominion.

Equally evident is that resort to the provisional remedies in question should entail the least possibleinterference with business operations or activities so that, in the event that the accusation of thebusiness enterprise being “ill-gotten” be not proven, it may be returned to its rightful owner as far aspossible in the same condition as it was at the time of sequestration.



etc.” The Memorandum should be construed in such a manner as to be consistent with, and not

contradictory to the Executive Orders earlier promulgated on the same matter. There should be noexercise of the right to vote simply because the right exists, or because the stocks sequesteredconstitute the controlling or a substantial part of the corporate voting power. The stock is not to bevoted to replace directors, or revise the articles or by-laws, or otherwise bring about substantial changesin policy, program or practice of the corporation except for demonstrably weighty and defensiblegrounds, and always in the context of the stated purposes of sequestration or provisional takeover, i.e.,to prevent the dispersion or undue disposal of the corporate assets. Directors are not to be voted outsimply because the power to do so exists. Substitution of directors is not to be done without reason orrhyme, should indeed be shunned if at all possible, and undertaken only when essential to preventdisappearance or wastage of corporate property, and always under such circumstances as to assure thatreplacements are truly possessed of competence, experience and probity.

In the case at bar, there was adequate justification to vote the incumbent directors out of office andelect others in their stead because the evidence showed prima facie that the former were just tools ofPresident Marcos and were no longer owners of any stock in the firm, if they ever were at all. This iswhy, in its Resolution of October 28, 1986[,] this Court declared that—

“Petitioner has failed to make out a case of grave abuse or excess of jurisdiction in respondents’ calling

and holding of a stockholders’ meeting for the election of directors as authorized by the Memorandum

of the President * * (to the PCGG) dated June 26, 1986, particularly, where as in this case, thegovernment can, through its designated directors, properly exercise control and management over whatappear to be properties and assets owned and belonging to the government itself and over which thepersons who appear in this case on behalf of BASECO have failed to show any right or even anyshareholding in said corporation.”

It must however be emphasized that the conduct of the PCGG nominees in the BASECO Board in themanagement of the company’s affairs should henceforth be guided and governed by the norms herein

laid down. They should never for a moment allow themselves to forget they are conservators, notowners of the business; they are fiduciaries, trustees, of whom the highest degree of diligence andrectitude is, in the premises, required. (Italics in the original)

The PCGG cannot thus vote sequestered shares, except when there are “demonstrably weighty and

defensible grounds” or “when essential to prevent disappearance or wastage of corporate

property.”*15+

The principle laid down in Baseco was further enhanced in the subsequent cases of Cojuungco v.Calpo[16] and Presidential Commission on Good Government v. Cojuangco, Jr.,[17] where this Courtdeveloped a “two-tiered” test in determining whether the PCGG may vote sequestered shares:

The issue of whether PCGG may vote the sequestered shares in SMC necessitates a determination of atleast two factual matters:

1. whether there is prima facie evidence showing that the said shares are ill-gotten and thus belong tothe state; and

2. whether there is an immediate danger of dissipation thus necessitating their continued sequestrationand voting by the PCGG while the main issue pends with the Sandiganbayan.[18]



The two-tiered test, however, does not apply in cases involving funds of “public character.” In such

cases, the government is granted the authority to vote said shares, namely:

(1) Where government shares are taken over by private persons or entities who/which registered themin their own names, and

(2) Where the capitalization or shares that were acquired with public funds somehow landed in privatehands.[19]

This Court, in Republic v. Cocofed,[20] explained:

The [public character] exceptions are based on the common-sense principle that legal fiction must yieldto truth; that public property registered in the names of non-owners is affected with trust relations; andthat the prima facie beneficial owner should be given the privilege of enjoying the rights flowing fromthe prima facie fact of ownership.

In Baseco, a private corporation known as the Bataan Shipyard and Engineering Co. was placed undersequestration by the PCGG. Explained the Court:

“The facts show that the corporation known as BASECO was owned and controlled by President Marcos

‘during his administration, through nominees, by taking undue advantage of his public office and/or

using his powers, authority, or influence,’ and that it was by and through the same means, that BASECO

had taken over the business and/or assets of the National Shipyard and Engineering Co., Inc., and othergovernment-owned or controlled entities.”

Given this factual background, the Court discussed PCGG’s right over BASECO in the following manner:

“Now, in the special instance of a business enterprise shown by evidence to have been ‘taken over bythe government of the Marcos Administration or by entities or persons close to former PresidentMarcos,’ the PCGG is given power and authority, as already adverted to, to provisionally take (it) over in

the public interest or to prevent (its) disposal or dissipation;’ and since the term is obviously

employed in reference to going concerns, or business enterprises in operation, something more thanmere physical custody is connoted; the PCGG may in this case exercise some measure of control in theoperation, running, or management of the business itself.”

Citing an earlier Resolution, it ruled further:

“Petitioner has failed to make out a case of grave abuse of excess of jurisdiction in respondent’s calling

and holding of a stockholder’s meeting for the election of directors as authorized by the Memorandum

of the President * * (to the PCGG) dated June 26, 1986, particularly, where as in this case, thegovernment can, through its designated directors, properly exercise control and management over whatappear to be properties and assets owned and belonging to the government itself and over which thepersons who appear in this case on behalf of BASECO have failed to show any right or even anyshareholding in said corporation.” (Italics supplied)



The Court granted PCGG the right to vote the sequestered shares because they appeared to be “assets

belonging to the government itself.” The Concurring Opinion of Justice Ameurfina A. Melencio-Herrera,in which she was joined by Justice Florentino P. Feliciano, explained this principle as follows:

“I have no objection to according the right to vote sequestered stock in case of a take-over of businessactually belonging to the government or whose capitalization comes from public funds but which,somehow, landed in the hands of private persons, as in the case of BASECO. To my mind, however,caution and prudence should be exercised in the case of sequestered shares of an on-going privatebusiness enterprise, specially the sensitive ones, since the true and real ownership of said shares is yetto be determined and proven more conclusively by the Courts.” (Italics supplied)

The exception was cited again by the Court in Cojuanco-Roxas in this wise:

“The rule in this jurisdiction is, therefore, clear. The PCGG cannot perform acts of strict ownership of

sequestered property. It is a mere conservator. It may not vote the shares in a corporation and electthe members of the board of directors. The only conceivable exception is in a case of a takeover of abusiness belonging to the government or whose capitalization comes from public funds, but which

landed in private hands as in BASECO.” (Italics supplied)

The “public character” test was reiterated in many subsequent cases; most recently, in Antiporda v.

Sandiganbayan. Expressly citing Cojuanco-Roxas, this Court said that in determining the issue ofwhether the PCGG should be allowed to vote sequestered shares, it was crucial to find out first whetherthis were purchased with public funds, as follows:

“It is thus important to determine first if the sequestered corporate shares came from public funds thatlanded in private hands.”

This Court summed up the rule in the determination of whether the PCGG has the right to vote

sequestered shares as follows:

In short, when sequestered shares registered in the names of private individuals or entities are allegedto have been acquired with ill-gotten wealth, then the two-tiered test is applied. However, when thesequestered shares in the name of private individuals or entities are shown, prima facie, to have been(1) originally government shares, or (2) purchased with public funds or those affected with publicinterest, then the two-tiered test does not apply. Rather, the public character exception in Baseco v.PCGG and Conjuanco Jr. v. Roxas prevail; that is, the government shall vote the shares.

The PCGG contends, however, that it is entitled to vote the sequestered shares in the election of theboard of directors, it invoking this Court’s alleged finding in PCGG et al. v. Securities and ExchangeCommission, et al.*21+ that Africa had dissipated ETPI’s assets, thus:

Under a consultancy contract, Polygon Investors and Managers, Inc. with Jose L. Africa as Chairman andVictor Africa as President, earned from ETPI as of 1987, more than P57 million. Likewise in 1987, ETPIpaid to Jose L. Africa P1,200,000.00 as “professional fees” and Manuel Nieto, Jr. another P1,200,000.00

as “allowances”.*22+

The PCGG’s contention is misleading, This Court made no finding in PCGG v. SEC et al. that Africadissipated ETPI’s assets. Precisely this Court issued a Resolution of July 28, 1988 in the same case to



clarify, upon motion of Africa, that the narration of facts found in the decision therein did not constitutea finding of facts:

The categorical statement in the decision of June 30, 1988 that the “relevant background facts of the

case culled from Petitioners’ Urgent Consolidated Petition” was not without a reason or purpose.

Precisely this statement was made to impress upon the parties that the narration of facts is just that – anarration, without necessarily judging its truth or veracity. Being based on mere allegations, properlycontroverted, it is not a finding of facts, but more of a presentation of the complete picture of eventswhich led to the sequestration of Eastern Telecommunications, Philippines, Inc. as well as to the instantpetition. This Court, it must be remembered, is not a trier of facts, and particularly so in this case wherethe facts narrated are precisely the facts in litigation before the Sandiganbayan. (Emphasis supplied.)

Unfortunately, the Sandiganbayan, in its impugned Resolution of November 13, 1992, skirted thequestion of whether there is evidence of dissipation of ETPI assets, holding instead that:

The issue as to whether the B[enedicto]A[frica]N[ieto] group had dissipated funds of ETPI during itsadministration of ETPI is a matter which is not in issue herein. Dissipation by the PCGG Board of

Directors is also charged by the BAN group. An investigation of the anomalies charged by one againstthe other may be taken up in another case.[23]

And it further held that the PCGG could not vote the sequestered shares as “only the owners of the

shares of stock of subject corporation, their duly authorized representatives or their proxies, may votethe said shares,”*24+ relying on this Court’s ruling in Cojuangco, Jr. v. Roxas*25+ that:

The rule in this jurisdiction is, therefore, clear. The PCGG cannot perform acts of strict ownership ofsequestered property. It is a mere conservator. It may not vote the shares in a corporation and electmembers of the board of directors. The only conceivable exception is in a case of a takeover of abusiness belonging to the government or whose capitalization comes from public funds, but which

landed in private hands as in BASECO.

In short, the Sandiganbayan held that the public character exception does not apply, in which case itshould have proceeded to apply the two-tiered test. This it failed to do.

The questions thus remain if there is prima facie evidence showing that the subject shares are ill-gottenand if there is imminent danger of dissipation. This Court is not, however, a trier of facts, hence, it is notin a position to rule on the correctness of the PCGG’s contention. Consequently, this issue must be

remanded to the Sandiganbayan for resolution.

II

On the PCGG’s submission that the Stock and Transfer Book should not be used as the basis for

determining the voting rights of the shareholders because some entries therein were altered “by

substitution”: This Court sees no grave abuse of discretion on the part of the Sandiganbayan in ruling

that:

The charge that there were “alterations by substitution” in the Stock and Transfer Book is not a matterwhich should preclude the Stock and Transfer Book from being the basis or guide to determine who thetrue owners of the shares of stock in ETPI are. If there be any substitution or alterations, the anomaly, if



at all, may be explained by the corporate secretary who made the entries therein. At any rate, theaccuracy of the Stock and Transfer Book may be checked by comparing the entries therein with theissued stock certificates. The fact is that any transfer of stock or issuance thereof would necessitate analteration of the record by substitution. Any anomaly in any entry which may deprive a person or entityof its right to vote may generate a controversy personal to the corporation and the stockholder andshould not affect the issue as to whether it is the PCGG or the shareholder who has the right to vote. Inother words, should there be a stockholder who feels aggrieved by any alteration by substitution in theStock and Transfer Book, said stockholder may object thereto at the proper time and before thestockholders meeting.[26]

Whether the ETPI Stock and Transfer Book was falsified and whether such falsification deprives the trueowners of the shares of their right to vote are thus issues best settled in a different proceedinginstituted by the real parties-in-interest.

III

On the PCGG’s submission that the Sandiganbayan gravely abused its discretion when it held that it

cannot vote at least 23.9% of the outstanding capital stock of ETPI, which percentage is broken down asfollows:

Shares ceded to the government by virtueof the Benedicto compromise - 12.8%

Shares represented by some stockcertificates found in Malacanang (at least) - 3.1%

Shares held and admitted by Manuel Nietoto belong to then President Marcos - 8.0%

The PCGG alleges that the 12.8% indicated above represents 51% of the combined shareholdings ofRoberto S. Benedicto and his controlled corporations amounting to 12.8% of the total equity of ETPIwhich was ceded to the Republic; the 3.1% represents the shares covered by the ETPI stock certificatesendorsed in blank found in Malacañang, now in its (PCGG’s) possession, which it submits it may, under

Section 34 of the Negotiable Instruments Law,[27] take title thereto and vote the same in thestockholders meeting; and the 8% represents the shares of Manuel H. Nieto, Jr. which, so it avers, he, inan Affidavit of May 28, 1986, admitted actually belong to former President Marcos:

5. That in relation to and simultaneously with the board meeting of PHILCOMSAT, on March 21, 1986, Ideclared my concurrence in the disclosures made on the participation of Mr. Ferdinand E. Marcos andassociates in the companies covered by the sequestration order dated March 14, 1986 i.e., 39,926.2%

(sic) of the total subscribed capital stock of Philippine Overseas Telecommunications Corporation and40% of the individual shareholdings of Jose L. Africa, Manuel H. Nieto, Jr., & Roberto S. Benedicto inEastern Telecommunications Philippines, Inc.[28]

On the question of whether the PCGG can vote all the above shares, the Sandiganbayan, finding in theaffirmative, held in its Resolution of November 13, 1992:



Considering the Compromise Agreement entered into by the PCGG and Roberto S. Benedicto in CivilCase No. 009 wherein Roberto S. Benedicto assigned and transferred to the Government 12.8% of theshares of stock of ETPI, which Compromise Agreement was made the basis of a judgment of this Court, itis only proper that the PCGG may vote these shares in the stockholders meeting after said judgmentshall have become final and executory. Besides, before the PCGG can vote these shares, the transfer tothe State of the shares of stock must be entered in the Stock and Transfer Book, the entries thereinbeing the only basis for which the stockholder may vote the said shares.

The same ruling is made in respect to the shares of stock represented by stock certificates found inMalacañang (3.1%) and the shares of stock allegedly admitted by Manuel H. Nieto to belong to formerPresident Ferdinand E. Marcos (8.0%).[29] (Underscoring supplied)

The Sandiganbayan clearly made no ruling proscribing the PCGG from voting the shares representing12.8% of ETPI’s outstanding capital stock, the only requirement it imposed being that the transfer of theshares be registered in the Stock and Transfer Book and that, in the case of the Benedicto shares, theCompromise Agreement be final and executory.

In requiring that the transfer of the Benedicto shares be first recorded in ETPI’s Stock and Transfer Bookbefore the PCGG may vote them, the Sandiganbayan committed no grave abuse of discretion. ForSection 63 of the Corporation Code provides:

Sec. 63. Certificate of stock and transfer of shares. – The capital stock of stock corporations shall bedivided into shares for which the certificates signed by the president or vice president, countersigned bythe secretary or assistant secretary, and sealed with the seal of the corporation shall be issued inaccordance with the by-laws. Shares of stock so issued are personal property and may be transferred bythe delivery of the certificate or certificates endorsed by the owner or his attorney-in-fact or otherperson legally authorized to make the transfer. No transfer, however, shall be valid, except as betweenthe parties to the transaction, the date of the transfer, the number of the certificate or certificates and

the number of shares transferred.

x x x.

Explaining why registration is a prerequisite for the voting of shares, this Court, in Batangas LagunaTayabas Bus Company, Inc., v. Bitanga,[30] discoursed:

Indeed, until registration is accomplished, the transfer, though valid between the parties, cannot beeffective as against the corporation. Thus, the unrecorded transferee x x x cannot vote nor be voted for.The purpose of registration, therefore, is two-fold: to enable the transferee to exercise all the rights of astockholder, including the right to vote and to be voted for, and to inform the corporation of any changein share ownership so that it can ascertain the persons entitled to the rights and subject to the liabilities

of a stockholder. Until challenged in a proper proceeding, a stockholder of record has a right toparticipate in any meeting; his vote can be properly counted to determine whether a stockholders’

resolution was approved, despite the claim of the alleged transferee. On the other hand, a person whohas purchased stock, and who desires to be recognized as a stockholder for the purpose of voting, mustsecure such a standing by having the transfer recorded on the corporate books. Until the transfer isregistered, the transferee is not a stockholder but an outsider.



Whether the PCGG needs to await the finality of the judgment[31] based on the Republic-Benedictocompromise agreement is now moot since it is not disputed that it had long become final and executory.Accordingly, the PCGG may vote in its name the shares ceded to the Republic by Benedicto pursuant tothe said agreement once they are registered in its name.

With respect to the PCGG’s submission that under Section 34 of the Negotiable Instruments Law, it may

take title to the shares represented by the blank stock certificates found in Malacanang and vote thesame, the same is untenable. The PCGG assumes that stock certificates are negotiable. They are not.

x x x [A]lthough a stock certificate is sometimes regarded as quasi-negotiable, in the sense that it may betransferred by delivery, it is well settled that the instrument is non-negotiable, because the holderthereof takes it without prejudice to such rights or defenses as the registered owner or creditor mayhave under the law, except insofar as such rights or defenses are subject to the limitations imposed bythe principles governing estoppel.[32]

That the PCGG found the stock certificates endorsed in blank does not necessarily make it the owner ofthe shares represented therein. Their true ownership has to be ascertained in a proper proceeding.

Similarly, the ownership of the Nieto shares has yet to be adjudicated. That they allegedly belong toformer President Marcos does not make the PCGG its owner. The PCGG must, in an appropriateproceeding, first establish that they truly belong to the former President and that they were ill- gotten.Pending final judgment over the ownership of these shares, the PCGG may not register and vote theNieto and the Malacañang shares in its name. If the Sandiganbayan finds, however, that there isevidence of dissipation of these shares, the PCGG may vote the same as conservator thereof.

IV

On the PCGG’s imputation of grave abuse of discretion upon the Sandiganbayan for ordering the holding

of a stockholders meeting to elect the ETPI board of directors without first setting in place, through the

amendment of the articles of incorporation and the by-laws of ETPI, the safeguards prescribed inCojuangco, Jr. v. Roxas:[33] This Court laid down those safeguards because of the obvious need toreconcile the rights of the stockholder whose shares have been sequestered and the duty of theconservator to preserve what could be ill-gotten wealth.

It is through the right to vote that the stockholder participates in the management of the corporation.The right to vote, unlike the rights to receive dividends and liquidating distributions, is not a passivething because management or administration is, under the Corporation Code, vested in the board ofdirectors, with certain reserved powers residing in the stockholders directly. The board of directors andexecutive committee (or management committee) and the corporate officers selected by the board maymake it very difficult if not impossible for the PCGG to carry out its duties as conservator if the Board orofficers do not cooperate, are hostile or antagonistic to the conservator’s objectives.

Thus, it is necessary to achieve a balancing of or a reconciliation between the stockholders’ right to vote

and the conservator’s statutory duty to recover and in the process thereof, to conserve assets, thoughtto be ill-gotten wealth, until final judicial determination of the character of such assets or until a finalcompromise agreement between the parties is reached.

There are, in the main, two (2) types of situations that need to be addressed. The first situation ariseswhere the sequestered shares of stock constitute a distinct minority of the voting shares of the



e. All transactions involving the disbursement of corporate funds in excess of P5 million must have theprior approval of the director representing the conservator, in order to be valid and effective.

f. The incurring of debt by the corporation, whether in the form of bonds, debentures, commercialpaper or any other form, in excess of P5 million, must have the prior approval of the directorrepresenting the conservator, in order to be valid and effective.

g. The disposition of a substantial part of assets of the corporation (substantial meaning in excess of P5million) shall require the prior approval of the director representing the conservator, in order to be validand effective.

h. The above safeguards must be written into the articles of incorporation and by-laws of the companyinvolved. In other words, the articles of incorporation and by-laws of the company must be amended soas to incorporate the above safeguards.

i. Any amendment of the articles of incorporation or by-laws of the company that will modify in any way

any of the above safeguards, shall need the prior approval of the director representing the conservator.

The amount of P5,000,000.00 referred to in paragraphs (e), (f) and (g) above is intended merely to beindicative. The precise amount may differ depending upon the size of the corporation involved and thereasonable operating requirements of its business.

Whether a particular case falls within the first or the second type of situation described above, thefollowing safeguards are indispensably necessary:

1. The sequestered shares and any stock dividends pertaining to such shares, may not be sold,transferred, alienated, mortgaged, or otherwise disposed of and no such sale, transfer or other

disposition shall be registered in the books of the corporation, pending final judicial resolution of thequestion of ill-gotten wealth or a final compromise agreement between the parties; and

2. Dividend and liquidating distributions shall not be delivered to the registered stockholders of thesequestered shares, including stock dividends pertaining to such shares, but shall instead be depositedin an escrow, interest-bearing, account in a first class bank or banks, acceptable to the Sandiganbayan,to be held by such banks for the benefit of whoever is held by final judicial decision or final compromiseagreement, to be entitled to the shares involved. (Italics in the original)

There is nothing in the Cojuangco case that would suggest that the above measures should beincorporated in the articles and by-laws before a stockholders meeting for the election of the board ofdirectors is held. The PCGG nonetheless insists that those measures should be written in the articles

and by-laws before such meeting, “otherwise, the *Marcos+ cronies will elect themselves or their

representatives, control the corporation, and for an appreciable period of time, have every opportunityto disburse funds, destroy or alter corporate records, and dissipate assets.” That could be a possibility,

but the peculiar circumstances of this case require that the election of the board of directors first beheld before the articles of incorporation are amended. Section 16 of the Corporation Code requires themajority vote of the board of directors to amend the articles of incorporation:



Sec. 16. Amendment of Articles of Incorporation. – Unless otherwise prescribed by this Code or byspecial law, and for legitimate purposes, any provision or matter stated in the articles of incorporationmay be amended by a majority vote of the board of directors or trustees and the vote or written assentof the stockholders representing at least two-thirds (2/3) of the outstanding capital stock, withoutprejudice to the appraisal right of dissenting stockholders in accordance with the provisions of this Code,or the vote or written assent of at least two thirds (2/3) of the members if it be a non-stock corporation.

x x x. (Emphasis supplied)

At the time Africa filed his motion for the holding of the annual stockholders meeting, there were twosets of ETPI directors, one controlled by the PCGG and the other by the registered stockholders. Whichof them is the legitimate board of directors? Which of them may rightfully vote to amend the articles ofincorporation and integrate the safeguards laid down in Cojuangco? It is essential, therefore, to curethis aberration of two boards of directors sitting in a single corporation before the articles ofincorporation are amended to set in place the Cojuangco safeguards.

The danger of the so-called Marcos cronies taking control of the corporation and dissipating its assets is,

of course, a legitimate concern of the PCGG, charged as it is with the duties of a conservator.Nevertheless, such danger may be averted by the “substantially contemporaneous” amendment of the

articles after the election of the board. This Court said as much in Cojuangco:

The Court is aware that the implementation of some of the above safeguards may require agreementbetween the registered stockholders and the PCGG as well as action on the part of the Securities andExchange Commission. The Court, therefore, directs petitioners and the PCGG to effect theimplementation of this decision under the supervision and control of the Sandiganbayan so that theright to vote the sequestered shares and the installation and operation of the safeguards above-specified may be exercised and effected in a substantially contemporaneous manner and with alldeliberate dispatch.

V

As for the PCGG’s contention that the Sandiganbayan gravely abused its discretion in ordering the

Division Clerk of Court to call the stockholders meeting and in appointing then Sandiganbayan AssociateJustice Sabino de Leon, Jr. to control and supervise the same, it is impressed with merit.

The Clerk of Court, who is already saddled with judicial responsibilities, need not be burdened with theadditional duties of a corporate secretary. Moreover, the Clerk of Court may not have the requisiteknowledge and expertise to discharge the functions of a corporate secretary. It is not thus surprising tofind the PCGG complaining that:

x x x ETPI’s By-laws provide:

“Sec. 4. Notice of Meeting. – Except as otherwise provided by law, written or printed notice of all annualand special meetings of stockholders, stating the place and time of the meeting and the general natureof the business to be considered, shall be transmitted by personal delivery, registered air-mail,telegraph, or cable to each stockholder of record entitled to vote thereat at his address last known tothe Secretary of the Company, at least ten (10) days before the date of the meeting, if an annualmeeting, or at least five (5) days before the date of the meeting, if a special meeting.”



Here, respondent Victor Africa filed a Motion dated March 30, 1992 asking the Sandiganbayan to “issue

the call and Notice of Annual Stockholder’s Meeting in ETPI” because under ETPI’s By-laws such meetingshould be held in the month of May. x x x. In the Resolution dated November 13, 1992, theSandiganbayan granted the Motion and authorized its Division Clerk of Court to issue such “Notice of

Annual Stockholder’s Meeting.” However, for inexplicable reasons, the Division Clerk of Court issued a“Notice of Special Stockholder’s Meeting” x x x which requires only a prior 5-day notice, instead of a“notice of (Delayed) Annual Stockholder’s Meeting” which requires a prior 10-day notice.

Instead of sending the Notices to each stockholder at his recorded address, the Division Clerk of Courtwhimsically sent all the Notices meant for the Class B stockholders to Atty. Eduardo de los Angeles (whoreturned the Notices because he was not authorized to receive such Notices). According to him x x x, hedoes not know some of the Class B stockholders for whom notices were sent to him. As a result, at thislate stage, no proper notice has been sent to Class B stockholders. Yet, the Sandiganbayan hasscheduled and is dead set to supervise a stockholder’s meeting on November 27, 1992. This clearlyviolates the substantial rights of the Class B stockholders who own 40% of ETPI. Under the Articles ofIncorporation x x x and By-laws x x x of ETPI, Class B stockholders are entitled to vote two members of

the Board of Directors. Unless properly notified, most of the Class B stockholders who reside in theUnited Kingdom (and whose shares are not sequestered) will not be able to exercise their right tovote.[34] (Underscoring in the original)

The appointment of a sitting member of the Sandiganbayan is particularly unsound for, as the PCGGpoints out:

x x x. What then is the reason for him to attend and supervise the meeting? To observe so that he canlater testify in the court where he himself sits – in the court which will eventually decide any controversywhich may arise from the meeting?[35]

Obviously, under such situation, the justice so appointed would be compelled to inhibit himself from any judicial controversy arising from the stockholders meeting.[36] Worse, if he were to preside at themeeting and rule upon the objections that may be raised by some stockholders, the Sandiganbayanwould be faced with the “anomaly”*37+ of eventually reviewing the decisions rendered by a member of

its court during the stockholders meeting.

This Court appreciates the quandary that the Sandiganbayan faced when it ordered its Division Clerk ofCourt to call the meeting: ETPI has two sets of officers and, presumably, two corporate secretaries. Andgiven the stakes involved, the stockholders meeting would be contentious, to say the least, hence, theneed for an impartial referee to supervise and control the meeting.

Happily, the case of Board of Directors and Election Committee of SMB Workers Savings and Loan Asso.,

Inc. v. Tan, etc., et al.*38+ provides a solution to the Sandiganbayan’s dilemma. There, this Court upheld

the creation of a committee empowered to call, conduct and supervise the election of the board ofdirectors:

As regards the creation of a committee of three vested with the authority to call, conduct and supervisethe election, and the appointment thereto of Cándido C. Viernes as chairman and representative of thecourt and one representative each from the parties, the Court in the exercise of its equity jurisdictionmay appoint such committee, it having been shown that the Election Committee that conducted the



election annulled by the respondent court if allowed to act as such may jeopardize the rights of therespondents.

In a proper proceeding a court of equity may direct the holding of a stockholders’ meeting under the

control of a special master, and the action taken at such a meeting will not be set aside because of awrongful use of the court’s interlocutory decree, where not brought to the attention of the court priorto the meeting. (18 C.J.S. 1270.)

A court of equity may, on showing of good reason, appoint a master to conduct and supervise anelection of directors when it appears that a fair election cannot otherwise be had. Such a court cannotmake directions contrary to statute and public policy with respect to the conduct of such election. (19C.J.S. 41)

This Court also approved a similar action by the Securities and Exchange Commission in Sales v.Securities and Exchange Commission.[39]

Such a committee composed of impartial persons knowledgeable in corporate proceedings would

provide the needed expertise and objectivity in the calling and the holding of the meeting withoutcompromising the Sandiganbayan or its officers. The appointment of the committee members and thedelineation of the scope of the duties of the committee may be made pursuant to an agreement by theparties or in accordance with the provisions of Rule 9 (Management Committee) of the Interim Rules ofProcedure for Intra-Corporate Controversies insofar as they are applicable.

VI

And now, Africa’s motion to cite the PCGG and its “accomplices” in contempt for calling and holding a

stockholders meeting to increase ETPI’s authorized capital stock without this Court’s authority and

despite the pendency of motions for reconsideration of the Sandiganbayan Resolution of December 13,

1996 granting the PCGG authority to cause the holding of such meeting. In the same motion, Africa asksthis Court to nullify the March 17, 1997 stockholders meeting which increased ETPI’s authorized capital

stock on the grounds that he, an ETPI stockholder, was not notified of the meeting, and the PCGG votedthe sequestered ETPI shares despite the absence of evidence of dissipation of assets. IntervenorAEROCOM has shared Africa’s assertions.

As earlier stated, this Court, by Resolution of May 7, 1996, referred the PCGG’s “VERY URGENT MOTION

FOR RECONSIDERATION TO HOLD SPECIAL STOCKHOLDERS MEETING . . .” to the Sandiganbayan for

reception of evidence and resolution. The dispositive portion of said Resolution reads:

Taking account of all the foregoing, the Court Resolved to REFER the “VERY URGENT PETITION FOR

AUTHORITY TO HOLD SPECIAL STOCKHOLDERS’ MEETING FOR SOLE PURPOSE OF INCREASING

EASTERN’S AUTHORIZED CAPITAL STOCK” to the Sandiganbayan for reception of evidence and resolution

– WITH ALL DELIBERATE DISPATCH but no longer than sixty (60) days from notice hereof – of the factualissues raised by the parties as herein set out, and such others, factual or otherwise as are relevant, inorder to decide the basic question in this proceeding of the necessity and propriety of the holding of thespecial stockholders’ meeting of EASTERN for the “sole purpose of increasing (its) authorized capital

stock” and the exercise by the PCGG of the right to vote at said meeting.[40] (Emphasis supplied)



Clearly, when the PCGG’s “VERY URGENT PETITION TO HOLD SPECIAL STOCKHOLDERS MEETING . . . ”

was referred to the Sandiganbayan, this Court gave the latter full authority to decide the issue ofwhether a stockholders meeting should be held. Implicit in this authority was the power to grant (ordeny) the petition. There is thus no need for the parties to seek this Court’s imprimatur to hold the

same.

Africa’s motion must thus be denied.

Even assuming arguendo that the holding of the meeting was contemptuous because the December 13,1996 Sandiganbayan Resolution had not yet attained finality, it was the Sandiganbayan, and not thisCourt, which was contemned. Consequently, it is the Sandiganbayan, and not this Court, which has jurisdiction over the motion to declare the PCGG and “its accomplices” in contempt.

In whatever context it may arise, contempt of court involves the doing of an act, or the failure to do anact, in such a manner as to create an affront to the court and the sovereign dignity with which it isclothed. As a matter of practical judicial administration, jurisdiction has been felt properly to rest in onlyone tribunal at a time with respect to a given controversy. Partly because of administrative

considerations, and partly to visit the full personal effect of the punishment on a contemnor, the rulehas been that no other court than the one contemned will punish a given contempt.

The rationale that is usually advanced for the general rule that the power to punish for contempt restswith the court contemned is that contempt proceedings are sui generic and are triable only by the courtagainst whose authority the contempts are charged; the power to punish for contempt exists for thepurpose of enabling a court to compel due decorum and respect in its presence and due obedience to its judgments, orders and processes; and in order that a court may compel obedience to its orders, it musthave the right to inquire whether there has been any disobedience thereof, for to submit the questionof disobedience to another tribunal would operate to deprive the proceeding of half its efficiency.[41]

The above rule is not of course absolute as it admits exception “when the entire case has already beenappealed [in which case] jurisdiction to punish for contempt rests with the appellate court where theappeal completely transfers to proceedings thereto or where there is a tendency to affect the status quoor otherwise interfere with the jurisdiction of the appellate court.”*42+ This exception does not,

however, apply to Africa’s motion since at the time he filed it on April 1, 1997 before this Court, his

petition in G. R. No. L-147214 assailing the December 17, 1996 Resolution of the Sandiganbayan had notyet been filed.

The motion to nullify the March 17, 1997 stockholders meeting must likewise be denied for lack of jurisdiction. Such motion is but an incident to Sandiganbayan Civil Case No. 0130.[43] As such, jurisdiction over it pertains exclusively and originally to the Sandiganbayan.

Under Section 2 of the President’s Executive Order No. 14 issued on May 7, 1986, all cases of the

Commission regarding “the Funds, Moneys, Assets, and Properties Illegally Acquired or Misappropriatedby Former President Ferdinand Marcos, Mrs. Imelda Romualdez Marcos, their Close Relatives,Subordinates, Business Associates, Dummies, Agents, or Nominees” whether civil or criminal are lodged

within the “exclusive and original jurisdiction of the Sandiganbayan” and all incidents arising from,

incidental to, or related to, such cases necessarily fall likewise under the Sandiganbayan’s exclusive and

original jurisdiction, subject to review on certiorari exclusively by the Supreme Court.[44]



This is another reason for the denial of the motion to cite the PCGG and its “accomplices” in contempt.

VII

FINALLY, the question on the validity of the PCCG’s voting the Class “A” shares to increase the

authorized capital stock of ETPI.

In his petition in G. R. No. 147214, Africa faults the Sandiganbayan for failing to acknowledge, in itsResolution of February 16, 2001, the Decisions of this Court declaring that his shares in ETPI[45] andthose of AEROCOM[46] and POLYGON (Polygon Investors & Managers, Inc.)[47] were not sequestered.Hence, so he contends, they, and not the PCGG, should have been allowed to vote their respectiveshares during the meeting.

Two matters require clarification at this point. First, that this Court rendered decisions holding that theshares of Africa, AEROCOM and POLYGON are not or are no longer sequestered is of little consequencesince the decisions were promulgated after the Sandiganbayan issued its resolution granting the PCGGauthority to call and hold the stockholders meeting to increase the authorized capital stock. At that

time, the shares were presumed to have been regularly sequestered. The more fundamental questionthat confronts this Court is: Was the PCGG entitled to vote the sequestered shares in the stockholdersmeeting of March 17, 1997?

Second, the PCGG correctly argues that Africa has no cause of action to claim on behalf of AEROCOMand POLYGON that these two companies are entitled to vote their respective shares in the stockholdersmeeting to increase ETPI’s authorized capital stock. The claim is personal to AEROCOM and POLYGON.Nevertheless, this does not preclude Africa from invoking his own right as a “small stockholder” of ETPI

to vote in the stockholders meeting for the purpose of increasing ETPI’s authorized capital stock. ThePCGG maintains, however, that it is entitled to vote said shares because this Court, by its claim,recognized in PCGG v. SEC, supra, that ETPI’s assets were being dissipated by the BAN (Benedicto, Africa,

Nieto) Group, thus:

Under the Management of Cable and Wireless ETPI grew and prospered. But when its dividends, whichwere paid in dollars to the BAN Group, began to run into millions, said group also started to intervene inthe corporation’s operations and management. Requests for employment of family relatives and highsalaries for them were made. The BAN Group likewise placed the majority of their individualstockholdings in three separate companies, namely: Aerocom Investors, Universal Molasses, andPolygon, so that in 1986, the ownership of the Class “A” stocks of the corporation was as follows:

Roberto S. Benedicto - 3.3 percentUniversal Molasses Corp. - 16.6 percentManuel Nieto, Jr. - 2.2 percent

Nieto's relatives - 3.3 percentAerocom Investors andManagers Inc. - 17.5 percentJose Africa - 2.2 percentAfrica's relatives - .3 percentPolygon Investors andManagers Inc. - 17.5 percent



By the end of 1987, the initial capital of P1M of the BAN Group, its corporations and relatives had grownto the astronomical sum of P784,185,198.00. Cash dividends paid to them as of 1986 had amounted toP225,845,000.00 even as another P180,000,000.00 is due them for 1987, for a grand total ofP405,845,000.00. In 1984, cash dividends to the BAN Group, et al. in the amount of $1M were remittedto the United States.

Under a consultancy contract, Polygon Investors and Managers with Jose L. Africa as Chairman and hisson, Victor Africa as President, earned from ETPI as of 1987 more than P57M. Likewise in 1987, ETPI paidto Jose L. Africa P1,200,000.00 as “professional fees” and Manuel H. Nieto, Jr., another P1,200,000.00 as

“allowances”.*48+

As stated early on, however, the foregoing narration does not constitute a finding of fact.

The PCGG further submits that the Sandiganbayan found prima facie evidence for the issuance of thewrit of sequestration covering the Class “A” shares of ETPI. Such reliance on the Sandiganbayan’s ruling

is misplaced because the issue is not whether there is prima facie evidence to warrant sequestration ofthe shares, but whether there is prima facie evidence showing that the shares are ill-gotten and whether

there is evidence of dissipation of assets to warrant the voting by the PCGG of sequestered shares. As tothe latter issue, the Sandiganbayan held in the affirmative in this wise:

x x x *T+he propriety and legality of allowing the PCGG to cause the holding of a stockholders’ meeting of

the ETPI for the purpose of electing a new Board of Directors or effecting changes in the policy, programand practices of said corporation (except for the specified purpose of amending the right of first refusalclause in ETPI’s Articles of Incorporation and By Laws) and impliedly to vote the sequestered shares of

stocks has been upheld by the Supreme Court in the case of “PCGG vs. SEC, PCGG vs. Sandiganbayan, et

al.”, G.R. No. 82188, promulgated June 30, 1988 x x x.*49+ (Underscoring supplied)

The Sandiganbayan proceeded to quote the following pronouncement of this Court in PCGG v. SEC:

But while We find the Sandiganbayan to have acted properly in enjoining the PCGG from holding thestockholders meeting for the specified purpose of amending the “right of first refusal” clause in ETPI's

Articles of Incorporation and By-Laws, We find the general injunction imposed by it on the PCGG todesist and refrain from calling a stockholders meeting for the purpose of electing a new Board ofDirectors of effecting substantial changes in the policy, program or practice of the corporation to be toobroad as to taint said order with grave abuse of discretion. Said order completely ties the hands of thePCGG, rendering it virtually helpless in the exercise of its power of conserving and preserving the assetsof the corporation. Indeed, of what use is the PCGG if it cannot even do this? x x x.[50] (Underscoringand italics supplied)

The Sandiganbayan, however, misread this Court’s ruling in the said SEC case. One of the issues raised

therein was whether the Sandiganbayan committed grave abuse of discretion in enjoining the PCGGfrom calling and holding stockholders meetings and voting the sequestered ETPI shares for the purposeof deleting the “right of first refusal” clause in ETPI’s articles of incorporation. In its therein assailed

Order, the Sandiganbayan temporarily restrained the PCGG “from calling and/or holding stockholders

meetings and voting the sequestered shares thereat for the purpose of amending the articles or by-lawsof ETPI, or otherwise effecting substantial changes in policy, programs or practices of said corporation.”



Clearly, the temporary restraining order was too broad. The Sandiganbayan should have limited itself torestraining the calling and holding of the stockholders meeting and voting the shares for the solepurpose of amending the “right of first refusal” clause. It was thus necessary for this Court to make the

underscored ruling above. No declaration therein was made that in all instances the PCGG may vote thesequestered shares to effect substantial changes in ETPI policy, programs or practices. In lifting theinjunction on that aspect, this Court merely recognized “that situations may arise wherein only throughan act of strict ownership can the PCGG be able to prevent the dissipation of the assets of thesequestered corporation or business.”*51+

Moreover, if, as the Sandiganbayan assumed, this Court had come to a conclusion in the SEC case thatthe BAN Group was guilty of dissipation and that, consequently, the PCGG was entitled to vote thesequestered shares, this Court would not have bothered, in its Resolution of May 7, 1996, to direct saidcourt to decide whether the PCGG has the right to vote in the stockholders meeting for the purpose ofincreasing ETPI’s authorized capital stock.*52+

This Court notes that, like in Africa’s motion to hold a stockholders meeting (to elect a board of

directors), the Sandiganbayan, in the PCGG’s petition to hold a stockholders meeting (to amend the

articles of incorporation to increase the authorized capital stock), again failed to apply the two-tieredtest. On such determination hinges the validity of the votes cast by the PCGG in the stockholdersmeeting of March 17, 1997. This lapse by the Sandiganbayan leaves this Court with no other choice butto remand these questions to it for proper determination.

IN SUM, this Court rules that:

(1) The PCGG cannot vote sequestered shares to elect the ETPI Board of Directors or to amend theArticles of Incorporation for the purpose of increasing the authorized capital stock unless there is aprima facie evidence showing that said shares are ill-gotten and there is an imminent danger ofdissipation.

(2) The ETPI Stock and Transfer Book should be the basis for determining which persons have the rightto vote in the stockholders meeting for the election of the ETPI Board of Directors.

(3) The PCGG is entitled to vote the shares ceded to it by Roberto S. Benedicto and his controlledcorporations under the Compromise Agreement, provided that the shares are first registered in thename of the PCGG. The PCGG may not register the transfer of the Malacañang and the Nieto shares inthe ETPI Stock and Transfer Book; however, it may vote the same as conservator provided that the PCGGsatisfies the two-tiered test devised by the Court in Cojuangco v. Calpo, supra.

(4) The safeguards laid down in the case of Cojuangco v. Roxas shall be incorporated in the ETPI Articlesof Incorporation substantially contemporaneous to, but not before, the election of the ETPI Board of

Directors.

(5) Members of the Sandiganbayan shall not participate in the stockholders meeting for the election ofthe ETPI Board of Directors. Neither shall a Clerk of Court be appointed to call such meeting and issuenotices thereof. The Sandiganbayan shall appoint, or the parties may agree to constitute, a committeeof competent and impartial persons to call, send notices and preside at the meeting for the election ofthe ETPI Board of Directors; and



(6) This Court has no jurisdiction over the motion to cite the PCGG and “its accomplices” in contempt

and to nullify the stockholders meeting of March 17, 1997.

WHEREFORE, this Court Resolved to REFER the petitions at bar to the Sandiganbayan for reception ofevidence to determine whether there is a prima facie evidence showing that the sequestered shares inquestion are ill-gotten and there is an imminent danger of dissipation to entitle the PCGG to vote themin a stockholders meeting to elect the ETPI Board of Directors and to amend the ETPI Articles ofIncorporation for the sole purpose of increasing the authorized capital stock of ETPI.

The Sandiganbayan shall render a decision thereon within sixty (60) days from receipt of this Resolutionand in conformity herewith.

The motion to cite the PCGG and its “accomplices” and to nullify the ETPI Stockholders Meeting of

March 17, 1997 filed by Victor Africa is DENIED for lack of jurisdiction.

SO ORDERED.

Davide, Jr., C.J., Bellosillo, Puno, Ynares-Santiago, Sandoval-Gutierrez, Carpio, Austria-Martinez, Corona,and Callejo, Sr., JJ., concur.Vitug, J., in the result.Panganiban, J., No part, former counsel of a party.Quisumbing, J., abroad on official business.Azcuna, J., No part.

Ilano v. Espanol

THIRD DIVISION

VICTORIA J. ILANO represented by her Attorney-in-fact, MILO ANTONIO C. ILANO,Petitioners,

- versus -

HON. DOLORES L. ESPAÑOL, in her capacity as Executive Judge, RTC of Imus, Cavite, Br. 90, and,AMELIA ALONZO, EDITH CALILAP, DANILO CAMACLANG, ESTELA CAMACLANG, ALLAN CAMACLANG,

LENIZA REYES, EDWIN REYES, JANE BACAREL, CHERRY CAMACLANG, FLORA CABRERA, ESTELITA LEGASPI,CARMENCITA GONZALES, NEMIA CASTRO, GLORIA DOMINGUEZ, ANNILYN C. SABALE and several JOHNDOES,Respondents.

G.R. No. 161756

Present:



PANGANIBAN, Chairman,SANDOVAL- GUTIERREZ,CORONA,CARPIO MORALES, andGARCIA, JJ.

Promulgated:

December 16, 2005

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D E C I S I O N

CARPIO MORALES, J.:

The Court of Appeals having affirmed the dismissal by Branch 20 of the Regional Trial Court (RTC)of Cavite at Imus, for lack of cause of action, Civil Case No. 2079-00, the complaint filed by hereinpetitioner Victoria J. Ilano for Revocation/Cancellation of Promissory Notes and Bills of Exchange(Checks) with Damages and Prayer for Preliminary Injunction or Temporary Restraining Order (TRO),[1]against herein respondents 15 named defendants (and several John Does), a recital of the pertinentallegations in the complaint, quoted verbatim as follows, is in order:

x x x

3. That defendant AMELIA O. ALONZO, is a trusted employee of [petitioner]. She has been with themfor several years already, and through the years, defendant ALONZO was able to gain the trust andconfidence of [petitioner] and her family;

4. That due to these trust and confidence reposed upon defendant ALONZO by [petitioner], there wereoccasions when defendant ALONZO was entrusted with *petitioner’s+ METROBANK Check Book

containing either signed or unsigned blank checks, especially in those times when [petitioner] left forthe United States for medical check-up;



Php 337,584.580111460Flora Cabrera98,000.000111514Nemia Castro100,000.000111542Nemia Castro150,000.000084078Edith Calilap/Danilo Calilap490,000.000111513Edith Calilap/Danilo Calilap790,272.000111512

Edith Calilap/Danilo Calilap1,220,000.000111462Gloria Dominguez/Carmencita Gonzales1,046,040.000111543Annilyn C. Sable150,000.000085134Annilyn C. Sable

250,000.000085149Annilyn C. Sable186,000.000085112

Copy attached as Annexes “D”, “D-1”, “D-2”, “D-3”, “D-4”, “D-5”, “D-6”, “D-7”, “D-8”, “D-9” and “D-10”,

respectively;

Furthermore, defendant ALONZO colluded and conspired with defendant NEMIA CASTO inprocuring the signature of *petitioner+ in documents denominated as “Malayang Salaysay” dated July 22,

1999 in the amount of PESOS: ONE HUNDRED FIFTY THOUSAND (Php 150,000.00) and another“Malayang Salaysay” dated November 22, 1999 in the amount of PESOS: ONE HUNDRED THOUSAND

(Php 100,000.00) Annexes “D-11” and “D-12” hereof;

11. That said defendants took undue advantage of the signature of [petitioner] in the said blank checksand furthermore forged and or falsified the signature of [petitioner] in other unsigned checks and as itwas made to appear that said [petitioner] is under the obligation to pay them several amounts ofmoney, when in truth and in fact, said [petitioner] does not owe any of said defendant any singleamount;



12. That the issuance of the aforementioned checks or Promissory Notes or the aforementioned“Malayang Salaysay” to herein defendants were tainted with fraud and deceit, and defendants

conspired with one another to defraud herein [petitioner] as the aforementioned documents wereissued for want of consideration;

13. That the aforesaid defendants conspiring and confederating together and helping one anothercommitted acts of falsification and defraudation which they should be held accountable under law;

14. The foregoing acts, and transactions, perpetrated by herein defendants in all bad faith and malice,with malevolence and selfish intent are causing anxiety, tension, sleepless nights, wounded feelings, andembarrassment to [petitioner] entitling her to moral damages of at least in the amount of PESOS: FIVEHUNDRED THOUSAND (Php 500,000.00);

15. That to avoid repetition of similar acts and as a correction for the public good, the defendants shouldbe held liable to [petitioner] for exemplary damages in the sum of not less than the amount of PESOS:TWO HUNDRED THOUSAND (Php 200,000.00);

16. That to protect the rights and interest of the [petitioner] in the illegal actuations of the defendants,she was forced to engage the services of counsel for which she was obliged to pay the sum of PESOS:ONE HUNDRED THOUSAND (Php 100,000.00) by way of Attorney’s fees plus the amount of PESOS:

THREE THOUSAND (Php 3,000.00) per appearance in court;

x x x (Emphasis and underscoring supplied)

The named defendants-herein respondents filed their respective Answers invoking, among othergrounds for dismissal, lack of cause of action, for while the checks subject of the complaint had been

issued on account and for value, some had been dishonored due to “ACCOUNT CLOSED;” and theallegations in the complaint are bare and general.

By Order*2+ dated October 12, 2000, the trial court dismissed petitioner’s complaint for failure “to

allege the ultimate facts”-bases of petitioners claim that her right was violated and that she suffereddamages thereby.

On appeal to the Court of Appeals, petitioner contended that the trial court:

A. . . . FAILED TO STATE CLEARLY AND DISTINCTLY THE FACTS AND LAW ON WHICH THEAPPEALED ORDER WAS BASED, THEREBY RENDERING SAID ORDER NULL AND VOID.

B. . . . ERRED IN HOLDING THAT THE COMPLAINT FAILED TO ALLEGE ULTIMATE FACTS ONWHICH [PETITIONER] RELIES ON HER CLAIM THEREBY DISMISSING THE CASE FOR LACK OF CAUSE OFACTION.



In issue then is whether petitioner’s complaint failed to state a cause of action.

A cause of action has three elements: (1) the legal right of the plaintiff, (2) the correlativeobligation of the defendant, and (3) the act or omission of the defendant in violation of said legal right.In determining the presence of these elements, inquiry is confined to the four corners of thecomplaint[6] including its annexes, they being parts thereof.[7] If these elements are absent, thecomplaint becomes vulnerable to a motion to dismiss on the ground of failure to state a cause ofaction.[8]

As reflected in the above-quoted allegations in petitioner’s complaint, petitioner is seeking twin reliefs,

one for revocation/cancellation of promissory notes and checks, and the other for damages.

Thus, petitioner alleged, among other things, that respondents, through “deceit,” “abuse of

confidence” “machination,” “fraud,” “falsification,” “forgery,” “defraudation,” and “bad faith,” and

“with malice, malevolence and selfish intent,” succeeded in inducing her to sign antedated promissory

notes and some blank checks, and “*by taking+ undue advantage” of her signature on some other blank

checks, succeeded in procuring them, even if there was no consideration for all of these instruments on

account of which she suffered “anxiety, tension, sleepless nights, wounded feelings andembarrassment.”

While some of the allegations may lack particulars, and are in the form of conclusions of law, theelements of a cause of action are present. For even if some are not stated with particularity, petitioneralleged 1) her legal right not to be bound by the instruments which were bereft of consideration and towhich her consent was vitiated; 2) the correlative obligation on the part of the defendants-respondents to respect said right; and 3) the act of the defendants-respondents in procuring hersignature on the instruments through “deceit,” “abuse of confidence” “machination,” “fraud,”

“falsification,” “forgery,” “defraudation,” and “bad faith,” and “with malice, malevolence and selfish

intent.”

Where the allegations of a complaint are vague, indefinite, or in the form of conclusions, itsdismissal is not proper for the defendant may ask for more particulars.[9]

With respect to the checks subject of the complaint, it is gathered that, except for Check No.0084078,*10+ they were drawn all against petitioner’s Metrobank Account No. 00703-955536-7.

Annex “D-8”*11+ of the complaint, a photocopy of Check No. 0085134, shows that it was dishonored onJanuary 12, 2000 due to “ACCOUNT CLOSED.” When petitioner then filed her complaint on March 28,

2000, all the checks subject hereof which were drawn against the same closed account were alreadyrendered valueless or non-negotiable, hence, petitioner had, with respect to them, no cause of action.

With respect to above-said Check No. 0084078, however, which was drawn against anotheraccount of petitioner, albeit the date of issue bears only the year − 1999, its validity and negotiablecharacter at the time the complaint was filed on March 28, 2000 was not affected. For Section 6 of theNegotiable Instruments Law provides:

Section 6. Omission; seal; particular money. – The validity and negotiable character of aninstrument are not affected by the fact that –



(a) It is not dated; or

(b) Does not specify the value given, or that any value had been given therefor; or

(c) Does not specify the place where it is drawn or the place where it is payable; or

(d) Bears a seal; or

(e) Designates a particular kind of current money in which payment is to be made.

x x x (Emphasis supplied)

However, even if the holder of Check No. 0084078 would have filled up the month and day of issuethereon to be “December” and “31,” respectively, it would have, as it did, become stale six (6) months

or 180 days thereafter, following current banking practice.[12]

It is, however, with respect to the questioned promissory notes that the present petition assumesmerit. For, petitioner’s allegations in the complaint relative thereto, even if lacking particularity, doesnot as priorly stated call for the dismissal of the complaint.

WHEREFORE, the petition is PARTLY GRANTED.

The March 21, 2003 decision of the appellate court affirming the October 12, 2000 Order of thetrial court, Branch 20 of the RTC of Imus, Cavite, is AFFIRMED with MODIFICATION in light of theforegoing discussions.

The trial court is DIRECTED to REINSTATE Civil Case No. 2079-00 to its docket and take further

proceedings thereon only insofar as the complaint seeks the revocation/cancellation of the subjectpromissory notes and damages.

Let the records of the case be then REMANDED to the trial court.

SO ORDERED.

CONCHITA CARPIO MORALESAssociate Justice

Equitable Banking Corp v. IAC

G.R. No. 74451 May 25, 1988

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



William R. Veto for petitioner.

Pelaez, Adriano & Gregorio for respondents.

MELENCIO-HERRERA, J.:

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

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

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

After defendant Casals talked with plaintiff's sales engineer, he was referred to plaintiffs executive vice-president, Apolonio Javier, for negotiation in connection with the manner of payment. When Javier

asked for cash payment for the skidders, defendant Casals informed him that his corporation, defendantCasville Enterprises, Inc., had a credit line with defendant Equitable Banking Corporation. Apparently,impressed with this assertion, Javier agreed to have the skidders paid by way of a domestic letter ofcredit which defendant Casals promised to open in plaintiffs favor, in lieu of cash payment. Accordingly,on December 22, 1975, defendant Casville, through its president, defendant Casals, ordered fromplaintiff two units of garrett skidders ...

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

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

PRICE: F.O.B. dock

Manila P485,000.00/unit

For two (2) units P970,000.00

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



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

xxx xxx xxx

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

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

xxx xxx xxx

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

In a letter dated August 3, 1976 (Exhibit "C"), defendants Casville informed the plaintiff that theirapplication for a letter of credit for the payment of the Garrett skidders had been approved by theEquitable Banking Corporation. However, the defendants said that they would need the sum of

P300,000.00 to stand as collateral or marginal deposit in favor of Equitable Banking Corporation and anadditional amount of P100,000.00, also in favor of Equitable Banking Corporation, to clear the title ofthe Estrada property belonging to defendant Casals which had been approved as security for the trustreceipts to be issued by the bank, covering the above-mentioned equipment.

Although the marginal deposit was supposed to be produced by defendant Casville Enterprises, plaintiffagreed to advance the necessary amount in order to facilitate the transaction. Accordingly, on August5,1976, plaintiff issued a check in the amount of P400,000.00 (Exhibit "2") drawn against the FirstNational City Bank and made payable to the order of Equitable Banking Corporation and with thefollowing notation or memorandum:

a/c of Casville Enterprises Inc. for Marginal deposit and payment of balance on Estrada Property to be

used as security for trust receipt for opening L/C of Garrett Skidders in favor of the Edward J. Nell Co."Said check together with the cash disbursement voucher (Exhibit "2-A") containing the explanation:

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

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



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

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

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

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

Defendant Casville sent a copy of the foregoing letter to the plaintiff enclosing three postdated checks.In said letter, plaintiff was informed of the requirements imposed by the defendant bank pointing outthat the "cash marginal required under paragraph (c) is 30% of Pl,091,000.00 or P327,300.00 plusanother P100,000.00 to clean up the Estrada property or a total of P427,300.00" and that the checkcovering said amount should be made payable "to the Order of EQUITABLE BANKING CORPORATION forthe account of Casville Enterprises Inc." Defendant Casville also stated that the three (3) enclosedpostdated checks were intended as replacement of the checks that were previously issued to plaintiff tosecure the sum of P427,300.00 that plaintiff would advance to defendant bank for the account ofdefendant Casville. All the new checks were postdated November 19, 1976 and drawn in the sum ofPl45,500.00 (Exhibit "F"), P181,800.00 (Exhibit "G") and P100,000.00 (Exhibit "H").

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

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

On August 16, 1976, plaintiff issued a check for P427,300.00, payable to the "order of EQUITABLEBANKING CORPORATION A/C CASVILLE ENTERPRISES, INC." and drawn against the first National City

Bank (Exhibit "E-l"). The check did not contain the notation found in the previous check issued by theplaintiff (Exhibit "2") but the substance of said notation was reproduced in a covering letter datedAugust 16,1976 that went with the check (Exhibit "E").<äre||anº•1àw> Both the check and the covering

letter were sent to defendant bank through defendant Casals. Plaintiff entrusted the delivery of thecheck and the latter to defendant Casals because it believed that no one, including defendant Casals,could encash the same as it was made payable to the defendant bank alone. Besides, defendant Casalswas known to the bank as the one following up the application for the letters of credit.



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

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

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

Plaintiff allowed some time before following up the application for the letters of credit knowing that ittook time to process the same. However, when the three checks issued to it by defendant Casville weredishonored, plaintiff became apprehensive and sent Umali on November 29, 1976, to inquire about thestatus of the application for the letters of credit. When plaintiff was informed that no letters of credit

were opened by the defendant bank in its favor and then discovered that defendant Casville had in themeanwhile withdrawn the entire amount of P427,300.00, without paying its obligation to the bankplaintiff filed the instant action.

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

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

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

xxx xxx xxx

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

xxx xxx xxx

Defendants Casals and Casville Enterprises and Equitable Banking Corporation are ordered to payplaintiff, jointly and severally, the sum of P427,300.00, representing the amount of plaintiff's check

which defendant bank erroneously credited to the account of defendant Casville and which defendantsCasal and Casville misappropriated, with 12% interest thereon from April 5, 1977, until the said sum isfully paid.

Defendant Equitable Banking Corporation is ordered to pay plaintiff attorney's fees in the sum ofP25,000.00 .

Proportionate cost against all the defendants.



SO ORDERED.

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

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

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

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

The Court finds that the check in question was payable only to the defendant bank and to no one else.Although the words "A/C OF CASVILLE ENTERPRISES INC. "appear on the face of the check after or under

the name of defendant bank, the payee was still the latter. The addition of said words did not in any waymake Casville Enterprises, Inc. the Payee of the instrument for the words merely indicated for whoseaccount or in connection with what account the check was issued by the plaintiff.

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

But said teller should have exercised more prudence in the handling of Id check because it was not madeout in the usual manner. The addition of the words A/C OF CASVILLE ENTERPRISES INC." should haveplaced the teller on guard and he should have clarified the matter with his superiors. Instead of doing

so, however, the teller decided to rely on his own judgment and at the risk of making a wrong decision,credited the entire amount in the name of defendant Casville although the latter was not the payeenamed in the check. Such mistake was crucial and was, without doubt, the proximate cause of plaintiffsdefraudation.

xxx xxx xxx

Respondent Appellate Court upheld the above conclusions stating in addition:

1) The appellee made the subject check payable to appellant's order, for the account of CasvilleEnterprises, Inc. In the light of the other facts, the directive was for the appellant bank to apply thevalue of the check as payment for the letter of credit which Casville Enterprises, Inc. had previously

applied for in favor of the appellee (Exhibit D-1, p. 5). The issuance of the subject check was precisely tomeet the bank's prior requirement of payment before issuing the letter of credit previously applied forby Casville Enterprises in favor of the appellee;

xxx xxx xxx

We disagree.



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

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

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

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

2) Contrary to the finding of respondent Appellate Court, the subject check was, initially, not non-negotiable. Neither was it a crossed check. The rubber-stamping transversall on the face of the subjectcheck of the words "Non-negotiable for Payee's Account Only" between two (2) parallel lines, and "Non-

negotiable, Teller- No. 4, August 17, 1976," separately boxed, was made only by the Bank teller inaccordance with customary bank practice, and not by NELL as the drawer of the check, and simplymeant that thereafter the same check could no longer be negotiated.

3) NELL's own acts and omissions in connection with the drawing, issuance and delivery of the 16August 1976 check, Exhibit "E-l," and its implicit trust in Casals, were the proximate cause of its owndefraudation: (a) The original check of 5 August 1976, Exhibit "2," was payable to the order solely of"Equitable Banking Corporation." NELL changed the payee in the subject check, Exhibit "E", however, to"Equitable Banking Corporation, A/C of Casville Enterprises Inc.," upon Casals request. NELL alsoeliminated both the cash disbursement voucher accompanying the check which read:

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

and the memorandum:

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

Evidencing the real nature of the transaction was merely a separate covering letter, dated 16 August1976, which Casals, sinisterly enough, suppressed from the Bank officials and teller.

(b) NELL entrusted the subject check and its covering letter, Exhibit "E," to Casals who, obviously,

had his own antagonistic interests to promote. Thus it was that Casals did not purposely present thesubject check to the Executive Vice-President of the Bank, who was aware of the negotiations regardingthe Letter of Credit, and who had rejected the previous check, Exhibit "2," including its three documentsbecause the terms and conditions required by the Bank for the opening of the Letter of Credit had notyet been agreed on.

(c) NELL was extremely accommodating to Casals. Thus, to facilitate the sales transaction, NELLeven advanced the marginal deposit for the garrett skidder. It is, indeed, abnormal for the seller of



goods, the price of which is to be covered by a letter of credit, to advance the marginal deposit for thesame.

(d) NELL had received three (3) postdated checks all dated 16 November, 1976 from Casvine tosecure the subject check and had accepted the deposit with it of two (2) titles of real properties ascollateral for said postdated checks. Thus, NELL was erroneously confident that its interests weresufficiently protected. Never had it suspected that those postdated checks would be dishonored, northat the subject check would be utilized by Casals for a purpose other than for opening the letter ofcredit.

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

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

WHEREFORE, the Petition is granted and the Decision of respondent Appellate Court, dated 4 October1985, and its majority Resolution, dated 28 April 1986, denying petitioner's Motion for Reconsideration,are hereby SET ASIDE. The Decision of the then Court of First Instance of Rizal, Branch XI. is modified inthat petitioner Equitable Banking Corporation is absolved from any and all liabilities to the privaterespondent, Edward J. Nell Company, and the Amended Complaint against petitioner bank is herebyordered dismissed. No costs.

SO ORDERED.

Yap, C.J., Paras and Sarmiento, J.J., concur.

Padilla, J., took no part.

Caltex Phils. v. Court of Appeals

G.R. No. 97753 August 10, 1992

CALTEX (PHILIPPINES), INC., petitioner,vs.

COURT OF APPEALS and SECURITY BANK AND TRUST COMPANY, respondents.

Bito, Lozada, Ortega & Castillo for petitioners.

Nepomuceno, Hofileña & Guingona for private.



REGALADO, J .:

This petition for review on certiorari impugns and seeks the reversal of the decision promulgated byrespondent court on March 8, 1991 in CA-G.R. CV No. 23615 1 affirming with modifications, the earlierdecision of the Regional Trial Court of Manila, Branch XLII, 2 which dismissed the complaint filed thereinby herein petitioner against respondent bank.

The undisputed background of this case, as found by the court a quo and adopted by respondentcourt, appears of record:

1. On various dates, defendant, a commercial banking institution, through its SucatBranch issued 280 certificates of time deposit (CTDs) in favor of one Angel dela Cruzwho deposited with herein defendant the aggregate amount of P1,120,000.00, asfollows: (Joint Partial Stipulation of Facts and Statement of Issues, Original Records,p. 207; Defendant's Exhibits 1 to 280);

CTD CTD Dates Serial Nos. Quantity Amount

22 Feb. 82 90101 to 90120 20 P80,00026 Feb. 82 74602 to 74691 90 360,0002 Mar. 82 74701 to 74740 40 160,0004 Mar. 82 90127 to 90146 20 80,0005 Mar. 82 74797 to 94800 4 16,0005 Mar. 82 89965 to 89986 22 88,0005 Mar. 82 70147 to 90150 4 16,0008 Mar. 82 90001 to 90020 20 80,0009 Mar. 82 90023 to 90050 28 112,0009 Mar. 82 89991 to 90000 10 40,0009 Mar. 82 90251 to 90272 22 88,000——— ————

Total 280 P1,120,000===== ========

2. Angel dela Cruz delivered the said certificates of time (CTDs) to herein plaintiff inconnection with his purchased of fuel products from the latter (Original Record, p.208).

3. Sometime in March 1982, Angel dela Cruz informed Mr. Timoteo Tiangco, theSucat Branch Manger, that he lost all the certificates of time deposit in dispute. Mr.Tiangco advised said depositor to execute and submit a notarized Affidavit of Loss,as required by defendant bank's procedure, if he desired replacement of said lostCTDs (TSN, February 9, 1987, pp. 48-50).

4. On March 18, 1982, Angel dela Cruz executed and delivered to defendant bankthe required Affidavit of Loss (Defendant's Exhibit 281). On the basis of said affidavitof loss, 280 replacement CTDs were issued in favor of said depositor (Defendant'sExhibits 282-561).

5. On March 25, 1982, Angel dela Cruz negotiated and obtained a loan fromdefendant bank in the amount of Eight Hundred Seventy Five Thousand Pesos(P875,000.00). On the same date, said depositor executed a notarized Deed of



Assignment of Time Deposit (Exhibit 562) which stated, among others, that he (de laCruz) surrenders to defendant bank "full control of the indicated time deposits fromand after date" of the assignment and further authorizes said bank to pre-terminate,set-off and "apply the said time deposits to the payment of whatever amount oramounts may be due" on the loan upon its maturity (TSN, February 9, 1987, pp. 60-62).

6. Sometime in November, 1982, Mr. Aranas, Credit Manager of plaintiff Caltex(Phils.) Inc., went to the defendant bank's Sucat branch and presented for verificationthe CTDs declared lost by Angel dela Cruz alleging that the same were delivered toherein plaintiff "as security for purchases made with Caltex Philippines, Inc." by saiddepositor (TSN, February 9, 1987, pp. 54-68).

7. On November 26, 1982, defendant received a letter (Defendant's Exhibit 563) fromherein plaintiff formally informing it of its possession of the CTDs in question and ofits decision to pre-terminate the same.

8. On December 8, 1982, plaintiff was requested by herein defendant to furnish the

former "a copy of the document evidencing the guarantee agreement with Mr. Angeldela Cruz" as well as "the details of Mr. Angel dela Cruz" obligation against whichplaintiff proposed to apply the time deposits (Defendant's Exhibit 564).

9. No copy of the requested documents was furnished herein defendant.

10. Accordingly, defendant bank rejected the plaintiff's demand and claim forpayment of the value of the CTDs in a letter dated February 7, 1983 (Defendant'sExhibit 566).

11. In April 1983, the loan of Angel dela Cruz with the defendant bank matured andfell due and on August 5, 1983, the latter set-off and applied the time deposits inquestion to the payment of the matured loan (TSN, February 9, 1987, pp. 130-131).

12. In view of the foregoing, plaintiff filed the instant complaint, praying thatdefendant bank be ordered to pay it the aggregate value of the certificates of timedeposit of P1,120,000.00 plus accrued interest and compounded interest therein at16% per annum, moral and exemplary damages as well as attorney's fees.

After trial, the court a quo rendered its decision dismissing the instant complaint. 3

On appeal, as earlier stated, respondent court affirmed the lower court's dismissal of the complaint,hence this petition wherein petitioner faults respondent court in ruling (1) that the subject certificatesof deposit are non-negotiable despite being clearly negotiable instruments; (2) that petitioner did notbecome a holder in due course of the said certificates of deposit; and (3) in disregarding the

pertinent provisions of the Code of Commerce relating to lost instruments payable to bearer. 4

The instant petition is bereft of merit.

A sample text of the certificates of time deposit is reproduced below to provide a betterunderstanding of the issues involved in this recourse.



SECURITY BANK AND TRUST COMPANY 6778 Ayala Ave., Makati No. 90101Metro Manila, PhilippinesSUCAT OFFICEP 4,000.00CERTIFICATE OF DEPOSIT

Rate 16%

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

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

(Sgd. Illegible) (Sgd. Illegible)

—————————— ———————————

AUTHORIZED SIGNATURES 5

Respondent court ruled that the CTDs in question are non-negotiable instruments, nationalizing asfollows:

. . . While it may be true that the word "bearer" appears rather boldly in the CTDsissued, it is important to note that after the word "BEARER" stamped on the spaceprovided supposedly for the name of the depositor, the words "has deposited" acertain amount follows. The document further provides that the amount depositedshall be "repayable to said depositor" on the period indicated. Therefore, the text of

the instrument(s) themselves manifest with clarity that they are payable, not towhoever purports to be the "bearer" but only to the specified person indicatedtherein, the depositor. In effect, the appellee bank acknowledges its depositor Angeldela Cruz as the person who made the deposit and further engages itself to pay saiddepositor the amount indicated thereon at the stipulated date. 6

We disagree with these findings and conclusions, and hereby hold that the CTDs in question arenegotiable instruments. Section 1 Act No. 2031, otherwise known as the Negotiable InstrumentsLaw, enumerates the requisites for an instrument to become negotiable, viz :

(a) It must be in writing and signed by the maker or drawer;

(b) Must contain an unconditional promise or order to pay a sum certain in money;

(c) Must be payable on demand, or at a fixed or determinable future time;

(d) Must be payable to order or to bearer; and

(e) Where the instrument is addressed to a drawee, he must be named or otherwiseindicated therein with reasonable certainty.



The CTDs in question undoubtedly meet the requirements of the law for negotiability. The parties'bone of contention is with regard to requisite (d) set forth above. It is noted that Mr. Timoteo P.Tiangco, Security Bank's Branch Manager way back in 1982, testified in open court that thedepositor reffered to in the CTDs is no other than Mr. Angel de la Cruz.

xxx xxx xxx

Atty. Calida:

q In other words Mr. Witness, you are saying that per books of thebank, the depositor referred (sic ) in these certificates states that itwas Angel dela Cruz?

witness:

a Yes, your Honor, and we have the record to show that Angel delaCruz was the one who cause (sic ) the amount.

Atty. Calida:

q And no other person or entity or company, Mr. Witness?

witness:

a None, your Honor. 7

xxx xxx xxx

Atty. Calida:

q Mr. Witness, who is the depositor identified in all of thesecertificates of time deposit insofar as the bank is concerned?

witness:

a Angel dela Cruz is the depositor. 8

xxx xxx xxx

On this score, the accepted rule is that the negotiability or non-negotiability of an instrument isdetermined from the writing, that is, from the face of the instrument itself. 9 In the construction of a billor note, the intention of the parties is to control, if it can be legally ascertained. 10 While the writing may be

read in the light of surrounding circumstances in order to more perfectly understand the intent andmeaning of the parties, yet as they have constituted the writing to be the only outward and visibleexpression of their meaning, no other words are to be added to it or substituted in its stead. The duty ofthe court in such case is to ascertain, not what the parties may have secretly intended ascontradistinguished from what their words express, but what is the meaning of the words they have used.What the parties meant must be determined by what they said. 11

Contrary to what respondent court held, the CTDs are negotiable instruments. The documentsprovide that the amounts deposited shall be repayable to the depositor. And who, according to the



document, is the depositor? It is the "bearer." The documents do not say that the depositor is Angelde la Cruz and that the amounts deposited are repayable specifically to him. Rather, the amountsare to be repayable to the bearer of the documents or, for that matter, whosoever may be the bearerat the time of presentment.

If it was really the intention of respondent bank to pay the amount to Angel de la Cruz only, it could

have with facility so expressed that fact in clear and categorical terms in the documents, instead ofhaving the word "BEARER" stamped on the space provided for the name of the depositor in eachCTD. On the wordings of the documents, therefore, the amounts deposited are repayable towhoever may be the bearer thereof. Thus, petitioner's aforesaid witness merely declared that Angelde la Cruz is the depositor "insofar as the bank is concerned," but obviously other parties not privy tothe transaction between them would not be in a position to know that the depositor is not the bearerstated in the CTDs. Hence, the situation would require any party dealing with the CTDs to go behindthe plain import of what is written thereon to unravel the agreement of the parties thereto throughfacts aliunde. This need for resort to extrinsic evidence is what is sought to be avoided by theNegotiable Instruments Law and calls for the application of the elementary rule that the interpretationof obscure words or stipulations in a contract shall not favor the party who caused the obscurity. 12

The next query is whether petitioner can rightfully recover on the CTDs. This time, the answer is inthe negative. The records reveal that Angel de la Cruz, whom petitioner chose not to implead in thissuit for reasons of its own, delivered the CTDs amounting to P1,120,000.00 to petitioner withoutinforming respondent bank thereof at any time. Unfortunately for petitioner, although the CTDs arebearer instruments, a valid negotiation thereof for the true purpose and agreement between it andDe la Cruz, as ultimately ascertained, requires both delivery and indorsement. For, althoughpetitioner seeks to deflect this fact, the CTDs were in reality delivered to it as a security for De laCruz' purchases of its fuel products. Any doubt as to whether the CTDs were delivered as paymentfor the fuel products or as a security has been dissipated and resolved in favor of the latter bypetitioner's own authorized and responsible representative himself.

In a letter dated November 26, 1982 addressed to respondent Security Bank, J.Q. Aranas, Jr.,Caltex Credit Manager, wrote: ". . . These certificates of deposit were negotiated to us by Mr. Angel

dela Cruz to guarantee his purchases of fuel products" (Emphasis ours.)13

This admission isconclusive upon petitioner, its protestations notwithstanding. Under the doctrine of estoppel, an admissionor representation is rendered conclusive upon the person making it, and cannot be denied or disprovedas against the person relying thereon. 14 A party may not go back on his own acts and representations tothe prejudice of the other party who relied upon them. 15 In the law of evidence, whenever a party has, byhis own declaration, act, or omission, intentionally and deliberately led another to believe a particularthing true, and to act upon such belief, he cannot, in any litigation arising out of such declaration, act, oromission, be permitted to falsify it. 16

If it were true that the CTDs were delivered as payment and not as security, petitioner's creditmanager could have easily said so, instead of using the words "to guarantee" in the letteraforequoted. Besides, when respondent bank, as defendant in the court below, moved for a bill ofparticularity therein 17 praying, among others, that petitioner, as plaintiff, be required to aver with

sufficient definiteness or particularity (a) the due date or dates of payment of the alleged indebtedness of Angel de la Cruz to plaintiff and (b) whether or not it issued a receipt showing that the CTDs weredelivered to it by De la Cruz as payment of the latter's alleged indebtedness to it, plaintiff corporationopposed the motion. 18 Had it produced the receipt prayed for, it could have proved, if such truly was thefact, that the CTDs were delivered as payment and not as security. Having opposed the motion, petitionernow labors under the presumption that evidence willfully suppressed would be adverse if produced. 19

Under the foregoing circumstances, this disquisition in Intergrated Realty Corporation, et al. vs.Philippine National Bank, et al . 20 is apropos:



. . . Adverting again to the Court's pronouncements in Lopez, supra, we quotetherefrom:

The character of the transaction between the parties is to bedetermined by their intention, regardless of what language was usedor what the form of the transfer was. If it was intended to secure the

payment of money, it must be construed as a pledge; but if there wassome other intention, it is not a pledge. However, even though atransfer, if regarded by itself, appears to have been absolute, itsobject and character might still be qualified and explained bycontemporaneous writing declaring it to have been a deposit of theproperty as collateral security. It has been said that a transfer ofproperty by the debtor to a creditor, even if sufficient on its face tomake an absolute conveyance, should be treated as a pledge if thedebt continues in inexistence and is not discharged by the transfer,and that accordingly the use of the terms ordinarily importingconveyance of absolute ownership will not be given that effect in sucha transaction if they are also commonly used in pledges andmortgages and therefore do not unqualifiedly indicate a transfer ofabsolute ownership, in the absence of clear and unambiguouslanguage or other circumstances excluding an intent to pledge.

Petitioner's insistence that the CTDs were negotiated to it begs the question. Under the NegotiableInstruments Law, an instrument is negotiated when it is transferred from one person to another insuch a manner as to constitute the transferee the holder thereof, 21 and a holder may be the payee orindorsee of a bill or note, who is in possession of it, or the bearer thereof. 22 In the present case, however,there was no negotiation in the sense of a transfer of the legal title to the CTDs in favor of petitioner inwhich situation, for obvious reasons, mere delivery of the bearer CTDs would have sufficed. Here, thedelivery thereof only as security for the purchases of Angel de la Cruz (and we even disregard the factthat the amount involved was not disclosed) could at the most constitute petitioner only as a holder forvalue by reason of his lien. Accordingly, a negotiation for such purpose cannot be effected by meredelivery of the instrument since, necessarily, the terms thereof and the subsequent disposition of suchsecurity, in the event of non-payment of the principal obligation, must be contractually provided for.

The pertinent law on this point is that where the holder has a lien on the instrument arising fromcontract, he is deemed a holder for value to the extent of his lien. 23 As such holder of collateral

security, he would be a pledgee but the requirements therefor and the effects thereof, not being providedfor by the Negotiable Instruments Law, shall be governed by the Civil Code provisions on pledge ofincorporeal rights, 24 which inceptively provide:

Art. 2095. Incorporeal rights, evidenced by negotiable instruments, . . . may also bepledged. The instrument proving the right pledged shall be delivered to the creditor,and if negotiable, must be indorsed.

Art. 2096. A pledge shall not take effect against third persons if a description of thething pledged and the date of the pledge do not appear in a public instrument.

Aside from the fact that the CTDs were only delivered but not indorsed, the factual findings ofrespondent court quoted at the start of this opinion show that petitioner failed to produce anydocument evidencing any contract of pledge or guarantee agreement between it and Angel de laCruz. 25 Consequently, the mere delivery of the CTDs did not legally vest in petitioner any right effective

against and binding upon respondent bank. The requirement under Article 2096 aforementioned is not amere rule of adjective law prescribing the mode whereby proof may be made of the date of a pledge



contract, but a rule of substantive law prescribing a condition without which the execution of a pledgecontract cannot affect third persons adversely. 26

On the other hand, the assignment of the CTDs made by Angel de la Cruz in favor of respondentbank was embodied in a public instrument. 27 With regard to this other mode of transfer, the Civil Code

specifically declares:

Art. 1625. An assignment of credit, right or action shall produce no effect as againstthird persons, unless it appears in a public instrument, or the instrument is recordedin the Registry of Property in case the assignment involves real property.

Respondent bank duly complied with this statutory requirement. Contrarily, petitioner, whether aspurchaser, assignee or lien holder of the CTDs, neither proved the amount of its credit or the extentof its lien nor the execution of any public instrument which could affect or bind private respondent.Necessarily, therefore, as between petitioner and respondent bank, the latter has definitely the betterright over the CTDs in question.

Finally, petitioner faults respondent court for refusing to delve into the question of whether or not

private respondent observed the requirements of the law in the case of lost negotiable instrumentsand the issuance of replacement certificates therefor, on the ground that petitioner failed to raisedthat issue in the lower court. 28

On this matter, we uphold respondent court's finding that the aspect of alleged negligence of privaterespondent was not included in the stipulation of the parties and in the statement of issues submittedby them to the trial court. 29 The issues agreed upon by them for resolution in this case are:

1. Whether or not the CTDs as worded are negotiable instruments.

2. Whether or not defendant could legally apply the amount covered by the CTDsagainst the depositor's loan by virtue of the assignment (Annex "C").

3. Whether or not there was legal compensation or set off involving the amountcovered by the CTDs and the depositor's outstanding account with defendant, if any.

4. Whether or not plaintiff could compel defendant to preterminate the CTDs beforethe maturity date provided therein.

5. Whether or not plaintiff is entitled to the proceeds of the CTDs.

6. Whether or not the parties can recover damages, attorney's fees and litigationexpenses from each other.

As respondent court correctly observed, with appropriate citation of some doctrinal authorities, theforegoing enumeration does not include the issue of negligence on the part of respondent bank. Anissue raised for the first time on appeal and not raised timely in the proceedings in the lower court isbarred by estoppel. 30 Questions raised on appeal must be within the issues framed by the parties and,consequently, issues not raised in the trial court cannot be raised for the first time on appeal. 31

Pre-trial is primarily intended to make certain that all issues necessary to the disposition of a caseare properly raised. Thus, to obviate the element of surprise, parties are expected to disclose at apre-trial conference all issues of law and fact which they intend to raise at the trial, except such as



may involve privileged or impeaching matters. The determination of issues at a pre-trial conferencebars the consideration of other questions on appeal. 32

To accept petitioner's suggestion that respondent bank's supposed negligence may be consideredencompassed by the issues on its right to preterminate and receive the proceeds of the CTDs wouldbe tantamount to saying that petitioner could raise on appeal any issue. We agree with private

respondent that the broad ultimate issue of petitioner's entitlement to the proceeds of the questionedcertificates can be premised on a multitude of other legal reasons and causes of action, of whichrespondent bank's supposed negligence is only one. Hence, petitioner's submission, if accepted,would render a pre-trial delimitation of issues a useless exercise. 33

Still, even assuming arguendo that said issue of negligence was raised in the court below, petitionerstill cannot have the odds in its favor. A close scrutiny of the provisions of the Code of Commercelaying down the rules to be followed in case of lost instruments payable to bearer, which it invokes,will reveal that said provisions, even assuming their applicability to the CTDs in the case at bar, aremerely permissive and not mandatory. The very first article cited by petitioner speaks for itself.

Art 548. The dispossessed owner , no matter for what cause it may be, may apply to

the judge or court of competent jurisdiction, asking that the principal, interest ordividends due or about to become due, be not paid a third person, as well as in orderto prevent the ownership of the instrument that a duplicate be issued him. (Emphasisours.)

xxx xxx xxx

The use of the word "may" in said provision shows that it is not mandatory but discretionary on thepart of the "dispossessed owner" to apply to the judge or court of competent jurisdiction for theissuance of a duplicate of the lost instrument. Where the provision reads "may," this word shows thatit is not mandatory but discretional. 34 The word "may" is usually permissive, not mandatory. 35 It is anauxiliary verb indicating liberty, opportunity, permission and possibility.36

Moreover, as correctly analyzed by private respondent, 37 Articles 548 to 558 of the Code ofCommerce, on which petitioner seeks to anchor respondent bank's supposed negligence, merelyestablished, on the one hand, a right of recourse in favor of a dispossessed owner or holder of a bearerinstrument so that he may obtain a duplicate of the same, and, on the other, an option in favor of the partyliable thereon who, for some valid ground, may elect to refuse to issue a replacement of the instrument.Significantly, none of the provisions cited by petitioner categorically restricts or prohibits the issuance aduplicate or replacement instrument sans compliance with the procedure outlined therein, and noneestablishes a mandatory precedent requirement therefor.

WHEREFORE, on the modified premises above set forth, the petition is DENIED and the appealeddecision is hereby AFFIRMED.

SO ORDERED.

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

People v. Romero



FIRST DIVISION

[G. R. No. 112985. April 21, 1999]

PEOPLE OF THE PHILIPPINES, plaintiff-appellee, vs. MARTIN L. ROMERO and ERNESTO C.

RODRIGUEZ,accused-appellants.

D E C I S I O N

PARDO, J .:

The case before the Court is an appeal of accused Martin L. Romero and Ernesto C. Rodriguez fromthe Joint Judgment[1] of the Regional Trial Court, Branch 2, Butuan City, convicting each of them of estafaunder Article 315, par. 2 (d) of the Revised Penal Code, in relation to Presidential Decree No. 1689, for

widescale swindling, and sentencing each of them to suffer the penalty of life imprisonment and to jointly and severally pay Ernesto A. Ruiz the amount of one hundred fifty thousand pesos (P150,000.00),with interest at the rate of twelve percent (12%) per annum, starting September 14, 1989, until fullypaid, and to pay ten thousand pesos (P10,000.00), as moral damages.

On October 25, 1989, Butuan City acting fiscal Ernesto M. Brocoy filed with the Regional Trial Court,Butuan City, an Information against the two (2) accused for estafa,[2] as follows:

“That on or about September 14, 1989, at Butuan City, Philippines, and within the jurisdiction of thisHonorable Court, the above-named accused being the General Manager and Operation Manager whichsolicit funds from the general public for investment, conspiring, confederating together and mutuallyhelping one another, by means of deceit and false pretense, did then and there willfully, unlawfully and

feloniously deliberately defraud one Ernesto A. Ruiz by convincing the latter to invest his money in theamount of P150,000.00 with a promise return of 800% profit within 21 days and in the process causedthe issuance of Butuan City Rural Rural [sic] Bank Check No. 158181 postdated to October 5, 1989 in theamount of One Million Two Hundred Thousand Pesos (P1,200,000.00) Philippine Currency, that uponpresentation of said check to the drawee bank for payment the same was dishonored and thatnotwithstanding repeated demands made on said accused to pay and/or change the check to cash, theyconsistently failed and refused and still fail and refuse to pay or redeem the check, to the damage andprejudice of the complainant in the aforestated amount of P1,200,000.00.”[3]

On the same day, the city fiscal filed with the same court another information against the two (2)accused for violation of Batas Pambansa Bilang 22, arising from the issuance of the same check.[4]

On January 11, 1990, both accused were arraigned before the Regional Trial Court, Branch5,[5] Butuan City, where they pleaded not guilty to both informations.

The prosecution presented its evidence on January 10, 1991, with complainant, Ernesto A. Ruiz, andDaphne Parrocho, the usher/collector of the corporation being managed by accused, testifying for theprosecution.

On August 12, 1991, the defense presented its only witness, accused Martin L. Romero.

http://sc.judiciary.gov.ph/jurisprudence/1999/apr99/112985.htm#_edn1






















On November 13, 1992, the parties submitted a joint stipulation of facts, signed only by theirrespective counsels. Thereafter, the case was submitted for decision.

On March 30, 1993, the trial court promulgated a Joint Judgment dated March 25, 1993. The trialcourt acquitted the accused in Criminal Case No. 3806[6] based on reasonable doubt, but convicted them

in Criminal Case No. 3808[7] and accordingly sentenced each of them, as follows:

“IN VIEW OF THE FOREGOING, the Court hereby renders judgment, finding or declaring -

“(a) Accused Martin L. Romero and Ernesto C. Rodriguez innocent on reasonable doubt in Criminal Case

No. 3806, for violation of Batas Pambansa Bilang 22;

“(b) Accused Martin L. Romero and Ernesto C .Rodriguez guilty beyond reasonable doubt in Criminal

Case No. 3808 for estafa under P.D. 1689 for wide scale [sic] swindling and accordingly sentences themto suffer life imprisonment (Section 1 P.D. 1689) and ordered jointly and severally to return to Ernesto A.Ruiz the amount of One Hundred Fifty Thousand Pesos (P150,000.00) with interest thereon at the rateof Twelve percent (12%) per annum starting from September 14, 1989 until fully paid and to pay the

amount of Ten Thousand Pesos (P10,000.00) as moral damages.

“In the service of their sentence, the accused pursuant to R.A. 6127, shall be credited for the preventiveimprisonment they have undergone (PP vs. Ortencio, 38 Phil 941; PP vs. Gabriel, No. L-13756, October30, 1959, cited in Gregorio’s “Fundamentals of Criminal Law Review”, P. 178, Seventh Edition, 1985).”[8]

On March 31, 1993, accused filed their notice of appeal, which the trial court gave due course onApril 5, 1993. On March 16, 1994, this Court ordered the accused to file their appellants’ brief.

Accused-appellants filed their brief on October 30, 1995, while the Solicitor General filed theappellee’s brief on March 8, 1996.

During the pendency of the appeal, on November 12, 1997, accused Ernesto Rodriguez died.[9] As aconsequence of his death before final judgment, his criminal and civil liability ex delicto, wereextinguished.[10]

Complainant Ernesto A. Ruiz was a radio commentator of Radio DXRB, Butuan City. In August,1989, he came to know the business of Surigao San Andres Industrial Development Corporation(SAIDECOR), when he interviewed accused Martin Romero and Ernesto Rodriguez regarding thecorporation’s investment operations in Butuan City and Agusan del Norte. Romero was the presidentand general manager of SAIDECOR, while Rodriguez was the operations manager.

SAIDECOR started its operation on August 24, 1989 as a marketing business. Later, it engaged insoliciting funds and investments from the public. The corporation guaranteed an 800% return oninvestment within fifteen (15) or twenty one (21) days. Investors were given coupons containing the

capital and the return on the capital collectible on the date agreed upon. It stopped operations inSeptember, 1989.

On September 14, 1989, complainant Ernesto A. Ruiz went to SAIDECOR office in Butuan City tomake an investment, accompanied by his friend Jimmy Acebu, and SAIDECOR collection agent DaphneParrocho. After handing over the amount of one hundred fifty thousand pesos (P150,000.00) to ErnestoRodriguez, complainant received a postdated Butuan City Rural Bank check instead of the usualredeemable coupon. The check indicated P1,000,200.00 as the amount in words, but the amount in





















figures was for P1,200,000.00, as the return on the investment. Complainant did not notice thediscrepancy.

When the check was presented to the bank for payment on October 5, 1989, it was dishonored forinsufficiency of funds, as evidenced by the check return slip issued by the bank.[11] Both accused could

not be located and demand for payment was made only sometime in November 1989 during the

preliminary investigation of this case. Accused responded that they had no money.

Daphne Parrocho,[12] testified that on September 14, 1989, complainant, with his friend JimmyAcebu, approached her to invest the amount of P150,000.00 at SAIDECOR. As she has reached herquota, and therefore, no longer authorized to receive the amount, she accompanied them to the officeof SAIDECOR at Ong Yiu District, Butuan City. Accused Ernesto Rodriguez accepted the investment andissued the check signed by him and Martin Romero.

For their defense, accused Martin Romero[13] testified that on September 14, 1989, he issued acheck in the amount of P1,200,000.00 corresponding to the total of the P150,000.00 investment and the800% return thereon. He claimed that the corporation had a deposit of fourteen million pesos(P14,000,000.00) at the time of the issuance of the check and four million pesos (P4,000,000.00) at the

time SAIDECOR stopped operations. Romero knew these things because he used to monitor the fundsof the corporation with the bank. He was not aware that the check he issued was dishonored becausehe never had the occasion to meet the complainant again after the September 14, 1989 transaction. Heonly came to know about this when the case was already filed in court sometime in the second or thirdweek of January 1990.[14]

In this appeal, both accused did not deny that complainant made an investment with SAIDECOR inthe amount of P150,000.00. However, they denied that deceit was employed in the transaction. Theyassigned as errors: (1) their conviction under P.D. 1689 due to the prosecution’s failure to establish theirguilt beyond reasonable doubt; and (2) the trial court’s failure to consider the joint stipulation of facts in

their favor.[15]There is no merit in this appeal. We sustain accused-appellant’s conviction.

Under paragraph 2 (d) of Article 315, as amended by R.A. 4885 ,[16] the elements of estafa are: (1) acheck was postdated or issued in payment of an obligation contracted at the time it was issued; (2) lackor insufficiency of funds to cover the check; (3) damage to the payee thereof .[17] The prosecution has

satisfactorily established all these elements.

Fraud, in its general sense, is deemed to comprise anything calculated to deceive, including all acts,omissions, and concealment involving a breach of legal or equitable duty, trust, or confidences justlyreposed, resulting in damage to another, or by which an undue and unconscientious advantage is takenof another.[18] It is a generic term embracing all multifarious means which human ingenuity can device,and which are resorted to by one individual to secure an advantage over another by false suggestions orby suppression of truth and includes all surprise, trick, cunning, dissembling and any unfair way by whichanother is cheated.[19]

Deceit is a specie of fraud. It is actual fraud, and consists in any false representation or contrivancewhereby one person overreaches and misleads another, to his hurt. Deceit excludes the idea ofmistake.[20] There is deceit when one is misled, either by guide or trickery or by other means, to believeto be true what is really false.[21] In this case, there was deception when accused fraudulentlyrepresented to complainant that his investment with the corporation would have an 800% return in 15

or 21 days.














































Upon receipt of the money, accused-appellant Martin Romero issued a postdated check. Althoughaccused-appellant contends that sufficient funds were deposited in the bank when the check wasissued, he presented no officer of the bank to substantiate the contention. The check was dishonoredwhen presented for payment, and the check return slip submitted in evidence indicated that it wasdishonored due to insufficiency of funds.

Even assuming for the sake of argument that the check was dishonored without any fraudulentpretense or fraudulent act of the drawer, the latter’s failure to cover the amount within three days afternotice creates a rebuttable presumption of fraud.[22]

Admittedly (1) the check was dishonored for insufficiency of funds as evidenced by the check returnslip; (2) complainant notified accused of the dishonor; and (3) accused failed to make good the checkwithin three days. Presumption of deceit remained since accused failed to prove otherwise.Complainant sustained damage in the amount of P150,000.00.

Accused-appellant also contends that had the trial court admitted the Admission and Stipulation ofFacts of November 9, 1992, it would prove that SAIDECOR had sufficient funds in the bank.

Accused-appellant relies on the fact that there was a discrepancy between the amount in words

and the amount in figures in the check that was dishonored. The amount in words was P1,000,200.00,while the amount in figures was P1,200,000.00. It is admitted that the corporation had in the bankP1,144,760.00 on September 28,1989, and P1,124,307.14 on April 2, 1990. The check was presented forpayment on October 5, 1989. The rule in the Negotiable Instruments Law is that when there is ambiguityin the amount in words and the amount in figures, it would be the amount in words that wouldprevail.[23]

However, this rule of interpretation finds no application in the case. The agreement was perfectlyclear that at the end of twenty one (21) days, the investment of P150,000.00 would becomeP1,200,000.00. Even if the trial court admitted the stipulation of facts, it would not be favorable toaccused-appellant.

The factual narration in this case established a kind of Ponzi scheme.[24]

This is “aninvestment swindle in which high profits are promised from fictitious sources and early investors are

paid off with f unds raised from later ones.” It is sometimes called a pyramid scheme because a broader

base of gullible investors must support the structure as time passes.

In the recent case of People vs. Priscilla Balasa ,[25] this Court held that a transaction similar to the

case at hand is not an investment strategy but a gullibility scheme, which works only as long as there isan ever increasing number of new investors joining the scheme. It is difficult to sustain over a longperiod of time because the operator needs an ever larger pool of later investors to continue paying thepromised profits to early investors. The idea behind this type of swindle is that the “con-man” collectshis money from his second or third round of investors and then absconds before anyone else shows upto collect. Necessarily, these schemes only last weeks, or months at most, just like what happened in

this case.

The Court notes that one of the accused-appellants, Ernesto Rodriguez, died pending appeal.Pursuant to the doctrine established in People vs. Bayotas ,

[26] the death of the accused pending appeal

of his conviction extinguishes his criminal liability as well as the civil liability ex delicto. The criminalaction is extinguished inasmuch as there is no longer a defendant to stand as the accused, the civilaction instituted therein for recovery of civil liability ex delicto is ipso facto extinguished, grounded as it























is on the criminal case. Corollarily, the claim for civil liability survives notwithstanding the death of theaccused, if the same may also be predicated on a source of obligation other than delict.[27]

Thus, the outcome of this appeal pertains only to the remaining accused-appellant, Martin L.Romero. The trial court considered the swindling involved in this case as having been committed by a

syndicate[28] and sentenced the accused to life imprisonment based on the provisions of Presidential

Decree 1689, which increased the penalty for certain forms of swindling or estafa.[29] However, theprosecution failed to clearly establish that the corporation was a syndicate, as defined under thelaw. The penalty of life imprisonment cannot be imposed. What would be applicable in the presentcase is the second paragraph of Presidential Decree No. 1689, Section 1, which provides that:

“When not committed by a syndicate as above defined, the penalty imposable shall be reclusion

temporal to reclusion perpetua if the amount of the fraud exceeds 100,000 pesos.”

Article 77 of the Revised Penal Code on complex penalties provides that “whenever the penalty

prescribed does not have one of the forms specially provided for in this Code, the periods shall bedistributed, applying by analogy the prescribed rules,” that is, those in Articles 61 and 76.[30] Hence,

where as in this case, the penalty provided by Section 1 of Presidential Decree No. 1689 for estafa underArticles 315 and 316 of the Code is reclusion temporal to reclusion perpetua, the minimum periodthereof is twelve (12) years and one (1) day to sixteen (16) years of reclusion temporal ; the mediumperiod is sixteen (16) years and one (1) day to twenty (20) years of reclusion temporal ; and themaximum period is reclusion perpetua.

In the case at bar, no mitigating or aggravating circumstance has been alleged or proved. Applyingthe rules in the Revised Penal Code for graduating penalties by degrees[31] to determine the properperiod,[32] the penalty for the offense of estafa under Article 315, 2(d) as amended by P.D. 1689involving the amount of P150,000.00 is the medium of the period of the complex penalty in said Section1, that is, sixteen (16) years and one (1) day to twenty (20) years. This penalty, being that which is to beactually imposed in accordance with the rules therefor and not merely imposable as a general

prescription under the law, shall be the maximum range of the indeterminate sentence .[33]

Theminimum thereof shall be taken, as aforesaid, from any period of the penalty next lower in degree,which is, prision mayor .

To enable the complainant to obtain means, diversion or amusements that will serve to alleviatethe moral sufferings undergone by him, by reason of the failure of the accused to return his money,

moral damages are imposed against accused-appellant Martin L. Romero in the amount of twentythousand pesos (P20,000.00).[34] To serve as an example for the public good, exemplary damages areawarded against him in the amount of fifteen thousand pesos (P15,000.00).[35]

WHEREFORE, the Court hereby AFFIRMS WITH MODIFICATION the appealed judgment. The Courthereby sentences accused-appellant Martin Romero to suffer an indeterminate penalty of ten (10) yearsand one (1) day of prision mayor, as minimum, to sixteen (16) years and one (1) day of reclusion

temporal , as maximum, to indemnify Ernesto A. Ruiz in the amount of one hundred fifty thousand pesos(P150,000.00) with interest thereon at six (6%) per centum per annum from September 14, 1989, untilfully paid, to pay twenty thousand pesos (P20,000.00) as moral damages and fifteen thousand pesos(P15,000.00), as exemplary damages, and the costs.

SO ORDERED.

Davide, Jr., C.J.,Melo, and Kapunan , JJ., concur.






































Ynares-Santiago, J. no part.

PNB v. Rodriguez

Republic of the PhilippinesSupreme CourtManila

THIRD DIVISION

PHILIPPINE NATIONAL BANK, G.R. No. 170325Petitioner,

Present:

YNARES-SANTIAGO, J.,Chairperson,

- versus - AUSTRIA-MARTINEZ,CHICO-NAZARIO,

NACHURA, andREYES, JJ.

ERLANDO T. RODRIGUEZ Promulgated:and NORMA RODRIGUEZ,Respondents. September 26, 2008x - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - 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 payableto 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 theCourt 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:



amounting to P2,345,804.00. The spouses contended that because PNB credited the checks to thePEMSLA account even without indorsements, PNB violated its contractual obligation to them asdepositors. 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 theclaim for damages should come from the payees of the checks, and not from spouses Rodriguez. Sincethere 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 withoutany indorsement from the payees. The bank contended that spouses Rodriguez, the makers, actuallydid not intend for the named payees to receive the proceeds of the checks. Consequently, the payeeswere considered as “fictitious payees” as defined under the Negotiable Instruments Law (NIL). Beingchecks made to fictitious payees which are bearer instruments, the checks were negotiable by meredelivery. PNB’s Answer included its cross-claim against its co-defendants PEMSLA and the MCP, prayingthat 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 weredismissed. 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 reinstateor 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 legalrate 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 ofdamages suffered by them taking into consideration the standing of the plaintiffs being sugarcaneplanters, realtors, residential subdivision owners, and other businesses:

(a) Consequential damages, unearned income in the amount of P4,000,000.00, as a result of theirhaving incurred great dificulty (sic) especially in the residential subdivision business, which was notpushed 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 checksshould 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 CAconcluded that the checks were obviously meant by the spouses to be really paid to PEMSLA. The courta quo declared:

We are not swayed by the contention of the plaintiffs-appellees (Spouses Rodriguez) that their cause ofaction arose from the alleged breach of contract by the defendant-appellant (PNB) when it paid thevalue of the checks to PEMSLA despite the checks being payable to order. Rather, we are moreconvinced 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 inexchange 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 forpresentment to the defendant-appellant that led to this present controversy. It also appears that theteller 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 thechecks were never meant to be paid to order, but instead, to PEMSLA. We thus find no breach ofcontract on the part of the defendant-appellant.

According to plaintiff-appellee Erlando Rodriguez’ testimony, PEMSLA allegedly issued post-datedchecks 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 favorof said applicant members. Based on the investigation of the defendant-appellant, meanwhile, thisarrangement allowed the plaintiffs-appellees to make a profit by issuing rediscounted checks, while theofficers of PEMSLA and other members would be able to claim their loans, despite the fact that theywere disqualified for one reason or another. They were able to achieve this conspiracy by using othermembers 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 fornegotiation; and that spouses Rodriguez and PEMSLA conspired with each other to accomplish thismoney-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 theirfaces were unquestionably payable to order; and that PNB committed a breach of contract when it paidthe value of the checks to PEMSLA without indorsement from the payees. They also argued that theircause 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 ofwhich read:



In sum, we rule that the defendant-appellant PNB is liable to the plaintiffs-appellees Sps. Rodriguez forthe following:

1. Actual damages in the amount of P2,345,804 with interest at 6% per annum from 14 May 1999until 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 WITHMODIFICATION the assailed decision rendered in Civil Case No. 99-10892, as set forth in the immediatelynext preceding paragraph hereof, and SETTING ASIDE Our original decision promulgated in this case on22 July 2004.

SO ORDERED.[9]

The CA ruled that the checks were payable to order. According to the appellate court, PNB failed topresent sufficient proof to defeat the claim of the spouses Rodriguez that they really intended thechecks to be received by the specified payees. Thus, PNB is liable for the value of the checks which itpaid to PEMSLA without indorsements from the named payees. The award for damages was deemedappropriate in view of the failure of PNB to treat the Rodriguez account with the highest degree of careconsidering the fiduciary nature of their relationship, which constrained respondents to seek legalaction.

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 whobears the loss?

PNB argues anew that when the spouses Rodriguez issued the disputed checks, they did not intend forthe named payees to receive the proceeds. Thus, they are bearer instruments that could be validlynegotiated by mere delivery. Further, testimonial and documentary evidence presented during trialamply proved that spouses Rodriguez and the officers of PEMSLA conspired with each other to defraudthe bank.

Our Ruling

Prefatorily, amendment of decisions is more acceptable than an erroneous judgment attaining finality tothe prejudice of innocent parties. A court discovering an erroneous judgment before it becomes finalmay, motu proprio or upon motion of the parties, correct its judgment with the singular objective ofachieving 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 Courtdoes not sanction careless disposition of cases by courts of justice. The highest degree of diligence mustgo into the study of every controversy submitted for decision by litigants. Every issue and factual detailmust be closely scrutinized and analyzed, and all the applicable laws judiciously studied, before thepromulgation 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 checkis considered as a bearer instrument. A check is “a bill of exchange drawn on a bank payable ondemand.”*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 theorder 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 thereinwith 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 theperson 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. UnderSection 30 of the NIL, an order instrument requires an indorsement from the payee or holder before itmay be validly negotiated. A bearer instrument, on the other hand, does not require an indorsement tobe 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 tobearer, it is negotiated by delivery; if payable to order, it is negotiated by the indorsement of the holdercompleted by delivery.

A check that is payable to a specified payee is an order instrument. However, under Section 9(c) of theNIL, a check payable to a specified payee may nevertheless be considered as a bearer instrument if it ispayable to the order of a fictitious or non-existing person, and such fact is known to the person makingit so payable. Thus, checks issued to “Prinsipe Abante” or “Si Malakas at si Maganda,” who are well-



However, there is a commercial bad faith exception to the fictitious-payee rule. A showing ofcommercial bad faith on the part of the drawee bank, or any transferee of the check for that matter, willwork to strip it of this defense. The exception will cause it to bear the loss. Commercial bad faith ispresent if the transferee of the check acts dishonestly, and is a party to the fraudulent scheme. Said theUS 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 notrelevant 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 factsand 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 fromUCC 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-banktransferees of the checks.

In the case under review, the Rodriguez checks were payable to specified payees. It is unrefuted thatthe 69 checks were payable to specific persons. Likewise, it is uncontroverted that the payees wereactual, existing, and living persons who were members of PEMSLA that had a rediscounting arrangementwith 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 intendfor 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 onthe 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-spouseswere transacting with PEMSLA and not the individual payees, it is understandable that they relied on theinformation 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 lowercourts, PNB failed to present sufficient evidence to defeat the claim of respondents-spouses that thenamed 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 payeeto have no interest in the transaction.

Because of a failure to show that the payees were “fictitious” in its broader sense, the fictitious-payeerule does not apply. Thus, the checks are to be deemed payable to order. Consequently, the draweebank bears the loss.[20]

PNB was remiss in its duty as the drawee bank. It does not dispute the fact that its teller or tellersaccepted 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 validindorsement.

A bank that regularly processes checks that are neither payable to the customer nor duly indorsed bythe payee is apparently grossly negligent in its operations.[21] This Court has recognized the uniquepublic interest possessed by the banking industry and the need for the people to have full trust andconfidence 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 thedrawer and to pay the check strictly inaccordance 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 theregularity of the indorsements, and the genuineness of the signatures on the checks before acceptingthem for deposit. Lastly, PNB was obligated to pay the checks in strict accordance with the instructionsof 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 ofindorsement, forged or otherwise. The facts clearly show that the bank did not pay the checks in strictaccordance with the instructions of the drawers, respondents-spouses. Instead, it paid the values of thechecks not to the named payees or their order, but to PEMSLA, a third party to the transaction betweenthe drawers and the payees.

Moreover, PNB was negligent in the selection and supervision of its employees. The trustworthiness ofbank employees is indispensable to maintain the stability of the banking industry. Thus, banks areenjoined to be extra vigilant in the management and supervision of their employees. In Bank of thePhilippine 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 degreeof responsibility, care and trustworthiness expected of their employees and officials is far greaterthan those of ordinary clerks and employees. For obvious reasons, the banks are expected to exercisethe 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 ofchecks 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 bythe payees must also fail. Damage was caused to respondents-spouses when the PEMSLA checks theydeposited 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 tonamed payees, PNB was duty-bound by law and by banking rules and procedure to require that thechecks be properly indorsed before accepting them for deposit and payment. In fine, PNB should beheld 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-defendantsPEMSLA and MPC. The records are bereft of any pleading filed by these two defendants in answer tothe complaint of respondents-spouses and cross-claim of PNB. The Rules expressly provide that failureto file an answer is a ground for a declaration that defendantis in default.[28] Yet, the RTC failed to sanction the failure of both PEMSLA and MPC to file responsivepleadings. Verily, the RTC dismissal of PNB’s cross-claim has no basis. Thus, this judgment shall bewithout 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 dueto 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 moraldamages to P50,000.00.[29]

WHEREFORE, the appealed Amended Decision is AFFIRMED with the MODIFICATION that the award formoral damages is reduced to P50,000.00, and that this is without prejudice to whatever civil, criminal, oradministrative action PNB might take against PEMSLA, MPC, and the employees involved.

SO ORDERED.

RUBEN T. REYESAssociate Justice

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