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

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

Marcial Esposo for plaintiff-appellant.

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

DIZON, J .:

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

On April 18, 1958 Enrique Montinola sought to purchase from the Manila PostOffice ten (10) money orders of P200.00 each payable to E.P. Montinolawithaddress at Lucena, Quezon. After the postal teller had made out moneyordersnumbered 124685, 124687-124695, Montinola offered to pay for them witha private checks were not generally accepted in payment of money orders, theteller advised him to see the Chief of the Money Order Division, but instead ofdoing so, Montinola managed to leave building with his own check and theten(10) money orders without the knowledge of the teller.

On the same date, April 18, 1958, upon discovery of the disappearance of the

unpaid money orders, an urgent message was sent to all postmasters, and thefollowing day notice was likewise served upon all banks, instructing them not topay anyone of the money orders aforesaid if presented for payment. The Bank of America received a copy of said notice three days later.

On April 23, 1958 one of the above-mentioned money orders numbered 124688was received by appellant as part of its sales receipts. The following day itdeposited the same with the Bank of America, and one day thereafter the lattercleared it with the Bureau of Posts and received from the latter its face value ofP200.00.

On September 27, 1961, appellee Mauricio A. Soriano, Chief of the Money OrderDivision of the Manila Post Office, acting for and in behalf of his co-appellee,Postmaster Enrico Palomar, notified the Bank of America that money order No.124688 attached to his letter had been found to have been irregularly issued andthat, in view thereof, the amount it represented had been deducted from thebank's clearing account. For its part, on August 2 of the same year, the Bank of

America debited appellant's account with the same amount and gave it advicethereof by means of a debit memo.

On October 12, 1961 appellant requested the Postmaster General to reconsiderthe action taken by his office deducting the sum of P200.00 from the clearingaccount of the Bank of America, but his request was denied. So was appellant'ssubsequent request that the matter be referred to the Secretary of Justice foradvice. Thereafter, appellant elevated the matter to the Secretary of PublicWorks and Communications, but the latter sustained the actions taken by thepostal officers.

In connection with the events set forth above, Montinola was charged with theft inthe Court of First Instance of Manila (Criminal Case No. 43866) but after t rial hewas acquitted on the ground of reasonable doubt.

On January 8, 1962 appellant filed an action against appellees in the MunicipalCourt of Manila praying for judgment as follows:

WHEREFORE, plaintiff prays that after hearingdefendants be ordered:

(a) To countermand the notice given to the Bank of America on September 27, 1961, deducting from the saidBank's clearing account the sum of P200.00 representedby postal money order No. 124688, or in the alternativeindemnify the plaintiff in the same amount with interest at8-½% per annum from September 27, 1961, which is therate of interest being paid by plaintiff on its overdraftaccount;

(b) To pay to the plaintiff out of their own personal funds, jointly and severally, actual and moral damages in theamount of P1,000.00 or in such amount as will be proved

and/or determined by this Honorable Court: exemplarydamages in the amount of P1,000.00, attorney's fees ofP1,000.00, and the costs of action.

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

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

WHEREFORE, judgment is hereby rendered, ordering the

defendants to countermand the notice given to the Bankof America on September 27, 1961, deducting from saidBank's clearing account the sum of P200.00 representingthe amount of postal money order No. 124688, or in thealternative, to indemnify the plaintiff in the said sum ofP200.00 with interest thereon at the rate of 8-½% perannum from September 27, 1961 until fully paid; withoutany pronouncement as to cost and attorney's fees.

The case was appealed to the Court of First Instance of Manila where, after theparties had resubmitted the same stipulation of facts, the appealed decisiondismissing the complaint, with costs, was rendered.

The first, second and fifth assignments of error discussed in appellant's brief arerelated to the other and will therefore be discussed jointly. They raise this mainissue: that the postal money order in question is a negotiable instrument; that itsnature 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 clearingaccount with the Post Office, and that money orders, once issued, create acontractual relationship of debtor and creditor, respectively, between thegovernment, 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 inthe United States. For this reason, ours are generally construed in accordancewith the construction given in the United States to their own postal statutes, in theabsence of any special reason justifying a departure from this policy or practice.The weight of authority in the United States is that postal money orders are notnegotiable instruments (Bolognesi vs. U.S. 189 Fed. 395; U.S. vs. Stock DrawersNational Bank, 30 Fed. 912), the reason behind this rule being that, inestablishing and operating a postal money order system, the government is notengaging in commercial transactions but merely exercises a governmental powefor the public benefit.

It is to be noted in this connection that some of the restrictions imposed upon

money orders by postal laws and regulations are inconsistent with the characterof negotiable instruments. For instance, such laws and regulations usuallyprovide for not more than one endorsement; payment of money orders may bewithheld under a variety of circumstances (49 C.J. 1153).

Of particular application to the postal money order in question are the conditionslaid down in the letter of the Director of Posts of October 26, 1948 (Exhibit 3) tothe Bank of America for the redemption of postal money orders received by itfrom its depositors. Among others, the condition is imposed that "in cases ofadverse 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 thePostmaster, Manila, who reserves the right to deduct the value thereof from anyamount due you if such step is deemed necessary." The conditions thus imposedin order to enable the bank to continue enjoying the facilities theretofore enjoyedby its depositors, were accepted by the Bank of America. The latter is thereforebound by them. That it is so is clearly referred from the fact that, upon receivingadvice that the amount represented by the money order in question had beendeducted from its clearing account with the Manila Post Office, it did not file any

protest against such action.

Moreover, not being a party to the understanding existing between the postalofficers, on the one hand, and the Bank of America, on the other, appellant hasno right to assail the terms and conditions thereof on the ground that the lettersetting forth the terms and conditions aforesaid is void because it was not issuedby a Department Head in accordance with Sec. 79 (B) of the Revised Administrative Code. In reality, however, said legal provision does not apply tothe letter in question because it does not provide for a department regulation butmerely sets down certain conditions upon the privilege granted to the Bank of Amrica to accept and pay postal money orders presented for payment at theManila Post Office. Such being the case, it is clear that the Director of Posts hadample authority to issue it pursuant to Sec. 1190 of the Revised AdministrativeCode.

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

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

G.R. No. 97753 August 10, 1992

CALTEX (PHILIPPINES), INC., petitioner,vs.COURT OF APPEALS and SECURITY BANK AND TRUSTCOMPANY, 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 thedecision promulgated by respondent court on March 8, 1991 in CA-G.R. CV No.23615

1 affirming with modifications, the earlier decision of the Regional TrialCourt of Manila, Branch XLII,

2 which dismissed the complaint filed therein byherein petitioner against respondent bank.

The undisputed background of this case, as found by the court a quo andadopted by respondent court, appears of record:

1. On various dates, defendant, a commercial bankinginstitution, through its Sucat Branch issued 280certificates of time deposit (CTDs) in favor of one Angeldela Cruz who deposited with herein defendant theaggregate amount of P1,120,000.00, as follows: (JointPartial 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 40 160,000

4 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 in connection with his purchasedof fuel products from the latter (Original Record, p. 208).

3. Sometime in March 1982, Angel dela Cruz informedMr. Timoteo Tiangco, the Sucat Branch Manger, that helost all the certificates of time deposit in dispute. Mr.Tiangco advised said depositor to execute and submit anotarized Affidavit of Loss, as required by defendantbank'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 anddelivered to defendant bank the required Affidavit of Loss(Defendant's Exhibit 281). On the basis of said affidavit ofloss, 280 replacement CTDs were issued in favor of saiddepositor (Defendant's Exhibits 282-561).

5. On March 25, 1982, Angel dela Cruz negotiated andobtained a loan from defendant bank in the amount ofEight Hundred Seventy Five Thousand Pesos(P875,000.00). On the same date, said depositor

executed a notarized Deed of Assignment of TimeDeposit (Exhibit 562) which stated, among others, that he(de la Cruz) surrenders to defendant bank "full control ofthe indicated time deposits from and after date" of theassignment and further authorizes said bank to pre-terminate, set-off and "apply the said time deposits to thepayment of whatever amount or amounts may be due" onthe loan upon its maturity (TSN, February 9, 1987, pp. 60-62).

6. Sometime in November, 1982, Mr. Aranas, CreditManager of plaintiff Caltex (Phils.) Inc., went to thedefendant bank's Sucat branch and presented for

verification the CTDs declared lost by Angel dela Cruzalleging that the same were delivered to herein plaintiff"as security for purchases made with Caltex Philippines,Inc." by said depositor (TSN, February 9, 1987, pp. 54-68).

7. On November 26, 1982, defendant received a letter(Defendant's Exhibit 563) from herein plaintiff fo rmallyinforming it of its possession of the CTDs in question andof its decision to pre-terminate the same.

8. On December 8, 1982, plaintiff was requested byherein defendant to furnish the former "a copy of thedocument evidencing the guarantee agreement with Mr. Angel dela Cruz" as well as "the details of Mr. Angel delaCruz" obligation against which plaintiff proposed to applythe time deposits (Defendant's Exhibit 564).

9. No copy of the requested documents was furnishedherein defendant.

10. Accordingly, defendant bank rejected the plaintiff'sdemand and claim for payment of the value of the CTDsin a letter dated February 7, 1983 (Defendant's Exhibit566).

11. In April 1983, the loan of Angel dela Cruz with thedefendant bank matured and fell 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 instantcomplaint, praying that defendant bank be ordered to pay

it the aggregate value of the certificates of time deposit ofP1,120,000.00 plus accrued interest and compoundedinterest therein at 16% per annum, moral and exemplarydamages as well as attorney's fees.

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

3

On appeal, as earlier stated, respondent court affirmed the lower court'sdismissal of the complaint, hence this petition wherein petitioner faultsrespondent court in ruling (1) that the subject certificates of 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) indisregarding the pertinent provisions of the Code of Commerce relating to lostinstruments 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 abetter understanding 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 DEPOSITRate 16%

Date of Maturity FEB. 23, 1984 FEB 22, 198219____

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This is to Certify that B E A R ER has deposited in this Bank thesum of PESOS: FOURTHOUSAND ONLY, SECURITYBANK SUCAT OFFICE P4,000 &00 CTS Pesos, PhilippineCurrency, repayable to saiddepositor 731 days. after date,upon presentation and surrenderof this certificate, with interest atthe rate of 16% per cent perannum.

(Sgd. Illegible) (Sgd. Illegible)

—————————— ———————————

AUTHORIZED SIGNATURES 5

Respondent court ruled that the CTDs in question are non-negotiableinstruments, nationalizing as follows:

. . . While it may be t rue that the word "bearer" appearsrather boldly in the CTDs issued, it is important to notethat after the word "BEARER" stamped on the spaceprovided supposedly for the name of the depositor, thewords "has deposited" a certain amount follows. Thedocument 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, notto whoever purports to be the "bearer" but only to thespecified person indicated therein, the depositor. In effect,the appellee bank acknowledges its depositor Angel delaCruz as the person who made the deposit and furtherengages itself to pay said depositor the amount indicatedthereon at the stipulated date.

6

We disagree with these findings and conclusions, and hereby hold that the CTDsin question are negotiable instruments. Section 1 Act No. 2031, otherwise knownas the Negotiable Instruments Law, enumerates the requisites for an instrumentto become negotiable, viz :

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

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

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

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

(e) Where the instrument is addressed to a drawee, hemust be named or otherwise indicated therein withreasonable certainty.

The CTDs in question undoubtedly meet the requirements of the law fornegotiability. The parties' bone of contention is with regard to requisite (d) setforth above. It is noted that Mr. Timoteo P. Tiangco, Security Bank's BranchManager way back in 1982, testified in open court that the depositor reffered to in

the CTDs is no other than Mr. Angel de la Cruz.

xxx xxx xxx

Atty. Calida:

q In other words Mr. Witness, youare 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 havethe record to show that Angel delaCruz was the one who cause (sic )the amount.

Atty. Calida:

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

witness:

a None, your Honor.7

xxx xxx xxx

Atty. Calida:

q Mr. Witness, who is thedepositor identified in all of thesecertificates of time deposit insofaras 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 aninstrument is determined from the writing, that is, from the face of the instrumentitself.

9 In the construction of a bill or note, the intention of the parties is to controlif it can be legally ascertained.

10 While the writing may be read in the light ofsurrounding circumstances in order to more perfectly understand the intent andmeaning of the parties, yet as they have constituted the writing to be the onlyoutward and visible expression of their meaning, no other words are to be addedto it or substituted in its stead. The duty of the court in such case is to ascertain,not what the parties may have secretly intended as contradistinguished fromwhat their words express, but what is the meaning of the words they have used.What the parties meant must be determined by what they said.

11

Contrary to what respondent court held, the CTDs are negotiable instruments.

The documents provide that the amounts deposited shall be repayable to thedepositor. And who, according to the document, is the depositor? It is the"bearer." The documents do not say that the depositor is Angel de la Cruz andthat the amounts deposited are repayable specifically to him. Rather, theamounts are to be repayable to the bearer of the documents or, for that matter,whosoever may be the bearer at the time of presentment.

If it was really the intention of respondent bank to pay the amount to Angel de laCruz only, it could have with facility so expressed that fact in clear andcategorical terms in the documents, instead of having the word "BEARER"stamped on the space provided for the name of the depositor in each CTD. Onthe wordings of the documents, therefore, the amounts deposited are repayableto whoever may be the bearer thereof. Thus, petitioner's aforesaid witnessmerely declared that Angel de la Cruz is the depositor "insofar as the bank isconcerned," but obviously other parties not privy to the transaction between themwould not be in a position to know that the depositor is not the bearer stated inthe CTDs. Hence, the situation would require any party dealing with the CTDs togo behind the plain import of what is written thereon to unravel the agreement of

the parties thereto through facts aliunde. This need for resort to extrinsicevidence is what is sought to be avoided by the Negotiable Instruments Law andcalls for the application of the elementary rule that the interpretation of obscurewords or stipulations in a contract shall not favor the party who caused theobscurity.

12

The next query is whether petitioner can rightfully recover on the CTDs. Thistime, the answer is in the negative. The records reveal that Angel de la Cruz,whom petitioner chose not to implead in this suit for reasons of its own, deliveredthe CTDs amounting to P1,120,000.00 to petitioner without informing respondentbank thereof at any time. Unfortunately for petitioner, although the CTDs arebearer instruments, a valid negotiation thereof for the true purpose andagreement between it and De la Cruz, as ultimately ascertained, requires bothdelivery and indorsement. For, although petitioner seeks to deflect this fact, theCTDs were in reality delivered to it as a security for De la Cruz' purchases of itsfuel products. Any doubt as to whether the CTDs were delivered as payment forthe fuel products or as a security has been dissipated and resolved in favor of thelatter by petitioner's own authorized and responsible representative himself.

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In a letter dated November 26, 1982 addressed to respondent Security Bank,J.Q. Aranas, Jr., Caltex Credit Manager, wrote: ". . . These certificates of depositwere negotiated to us by Mr. Angel dela Cruz to guarantee his purchases of fuel products" (Emphasis ours.)

13 This admission is conclusive upon petitioner, itsprotestations notwithstanding. Under the doctrine of estoppel, an admission orrepresentation is rendered conclusive upon the person making it, and cannot bedenied or disproved as against the person relying thereon.

14 A party may not go

back on his own acts and representations to the prejudice of the other party whorelied upon them.

15 In the law of evidence, whenever a party has, by his owndeclaration, act, or omission, intentionally and deliberately led another to believea particular thing true, and to act upon such belief, he cannot, in any litigationarising out of such declaration, act, or omission, be permitted to falsify it.

16

If it were true that the CTDs were delivered as payment and not as security,petitioner's credit manager could have easily said so, instead of using the words"to guarantee" in the letter aforequoted. Besides, when respondent bank, asdefendant in the court below, moved for a bill of particularity therein

17 praying,among others, that petitioner, as plaintiff, be required to aver with sufficientdefiniteness or particularity (a) the due date or dates of payment of the allegedindebtedness of Angel de la Cruz to plaintiff and (b) whether or not it issued areceipt showing that the CTDs were delivered to it by De la Cruz as payment ofthe latter's alleged indebtedness to it, plaintiff corporation opposed themotion.

18 Had it produced the receipt prayed for, it could have proved, if suchtruly was the fact, that the CTDs were delivered as payment and not as security.Having opposed the motion, petitioner now labors under the presumption thatevidence willfully suppressed would be adverse if produced.

19

Under the foregoing circumstances, this disquisition in Intergrated RealtyCorporation, et al. vs. Philippine National Bank, et al .

20 is apropos:

. . . Adverting again to the Court's pronouncements

in Lopez, supra, we quote therefrom:

The character of the transactionbetween the parties is to bedetermined by their intention,regardless of what language wasused or what the form of thetransfer was. If it was intended tosecure the payment of money, itmust be construed as a pledge;but if there was some otherintention, it is not a pledge.However, even though a transfer,if regarded by itself, appears tohave been absolute, its object andcharacter might still be qualifiedand explained bycontemporaneous writing

declaring it to have been a depositof the property as collateralsecurity. It has been said that atransfer of property by the debtorto a creditor, even if sufficient onits face to make an absoluteconveyance, should be treated asa pledge if the debt continues ininexistence and is not dischargedby the transfer, and thataccordingly the use of the termsordinarily importing conveyance ofabsolute ownership will not begiven that effect in such atransaction if they are alsocommonly used in pledges andmortgages and therefore do notunqualifiedly indicate a transfer ofabsolute ownership, in the

absence of clear andunambiguous language or othercircumstances excluding an intentto pledge.

Petitioner's insistence that the CTDs were negotiated to it begs the question.Under the Negotiable Instruments Law, an instrument is negotiated when it istransferred from one person to another in such a manner as to constitute thetransferee the holder thereof,

21 and a holder may be the payee or indorsee of a

bill or note, who is in possession of it, or the bearer thereof.22 In the present

case, however, there was no negotiation in the sense of a transfer of the legaltitle to the CTDs in favor of petitioner in which situation, for obvious reasons,mere delivery of the bearer CTDs would have sufficed. Here, the delivery thereofonly as security for the purchases of Angel de la Cruz (and we even disregardthe fact that the amount involved was not disclosed) could at the most constitutepetitioner only as a holder for value by reason of his lien. Accordingly, anegotiation for such purpose cannot be effected by mere delivery of the

instrument since, necessarily, the terms thereof and the subsequent dispositionof such security, in the event of non-payment of the principal obligation, must becontractually provided for.

The pertinent law on this point is that where the holder has a lien on theinstrument arising from contract, he is deemed a holder for value to the extent ofhis lien.

23 As such holder of collateral security, he would be a pledgee but therequirements therefor and the effects thereof, not being provided for by theNegotiable Instruments Law, shall be governed by the Civil Code provisions onpledge of incorporeal rights,

24 which inceptively provide:

Art. 2095. Incorporeal rights, evidenced by negotiableinstruments, . . . may also be pledged. The instrumentproving the right pledged shall be delivered to thecreditor, and if negotiable, must be indorsed.

Art. 2096. A pledge shall not take effect against thirdpersons if a description of the thing pledged and the dateof the pledge do not appear in a public instrument.

Aside from the fact that the CTDs were only delivered but not indorsed, thefactual findings of respondent court quoted at the start of this opinion show thatpetitioner failed to produce any document evidencing any contract of pledge orguarantee agreement between it and Angel de la Cruz.

25 Consequently, themere delivery of the CTDs did not legally vest in petitioner any right effectiveagainst and binding upon respondent bank. The requirement under Article 2096aforementioned is not a mere rule of adjective law prescribing the mode wherebyproof may be made of the date of a pledge contract, but a rule of substantive lawprescribing a condition without which the execution of a pledge contract cannotaffect third persons adversely.

26

On the other hand, the assignment of the CTDs made by Angel de la Cruz infavor of respondent bank was embodied in a public instrument.

27 With regard tothis other mode of transfer, the Civil Code specifically declares:

Art. 1625. An assignment of credit, right or action shallproduce no effect as against third persons, unless itappears in a public instrument, or the instrument isrecorded in the Registry of Property in case theassignment involves real property.

Respondent bank duly complied with this statutory requirement. Contrarily,petitioner, whether as purchaser, assignee or lien holder of the CTDs, neitherproved the amount of its credit or the extent of its lien nor the execution of anypublic instrument which could affect or bind private respondent. Necessarily,therefore, as between petitioner and respondent bank, the latter has definitely thebetter right over the CTDs in question.

Finally, petitioner faults respondent court for refusing to delve into the question ofwhether or not private respondent observed the requirements of the law in thecase of lost negotiable instruments and the issuance of replacement certificatestherefor, on the ground that petitioner failed to raised that issue in the lowercourt.

28

On this matter, we uphold respondent court's finding that the aspect of allegednegligence of private respondent was not included in the stipulation of the partiesand in the statement of issues submitted by them to the trial court.

29 The issuesagreed upon by them for resolution in this case are:

1. Whether or not the CTDs as worded are negotiableinstruments.

2. Whether or not defendant could legally apply the

amount covered by the CTDs against the depositor's loanby virtue of the assignment (Annex "C").

3. Whether or not there was legal compensation or set offinvolving the amount covered by the CTDs and thedepositor's outstanding account with defendant, if any.

4. Whether or not plaintiff could compel defendant topreterminate the CTDs before the maturity date providedtherein.

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

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

As respondent court correctly observed, with appropriate citation of somedoctrinal authorities, the foregoing enumeration does not include the issue ofnegligence on the part of respondent bank. An issue raised for the first time onappeal and not raised timely in the proceedings in the lower court is barred byestoppel.

30 Questions raised on appeal must be within the issues framed by theparties and, consequently, issues not raised in the trial court cannot be raised forthe first time on appeal.

31

Pre-trial is primarily intended to make certain that all issues necessary to thedisposition of a case are properly raised. Thus, to obviate the element ofsurprise, parties are expected to disclose at a pre-trial conference all issues oflaw and fact which they intend to raise at the trial, except such as may involveprivileged or impeaching matters. The determination of issues at a pre-trialconference bars the consideration of other questions on appeal.

32

To accept petitioner's suggestion that respondent bank's supposed negligencemay be considered encompassed by the issues on its right to preterminate andreceive the proceeds of the CTDs would be tantamount to saying that petitionercould raise on appeal any issue. We agree with private respondent that the broadultimate issue of petitioner's entitlement to the proceeds of the questionedcertificates can be premised on a multitude of other legal reasons and causes ofaction, of which respondent bank's supposed negligence is only one. Hence,petitioner's submission, if accepted, would render a pre-trial delimitation of issuesa useless exercise.

33

Still, even assuming arguendo that said issue of negligence was raised in thecourt below, petitioner still cannot have the odds in its favor. A close scrutiny of

the provisions of the Code of Commerce laying down the rules to be followed incase of lost instruments payable to bearer, which it invokes, will reveal that saidprovisions, even assuming their applicability to the CTDs in the case at bar, aremerely permissive and not mandatory. The very first article cited by petitionerspeaks for itself.

Art 548. The dispossessed owner , no matter for whatcause it may be, may apply to the judge or court ofcompetent jurisdiction, asking that the principal, interestor dividends due or about to become due, be not paid athird person, as well as in order to prevent the ownershipof the instrument that a duplicate be issued him.(Emphasis ours.)

xxx xxx xxx

The use of the word "may" in said provision shows that it is not mandatory but

discretionary on the part of the "dispossessed owner" to apply to the judge orcourt of competent jurisdiction for the issuance of a duplicate of the lostinstrument. Where the provision reads "may," this word shows that it is notmandatory but discretional.

34 The word "may" is usually permissive, not

mandatory.35 It is an auxiliary verb indicating liberty, opportunity, permission and

possibility.36

Moreover, as correctly analyzed by private respondent,37 Articles 548 to 558 of

the Code of Commerce, on which petitioner seeks to anchor respondent bank'ssupposed negligence, merely established, on the one hand, a right of recourse infavor of a dispossessed owner or holder of a bearer instrument so that he mayobtain 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 areplacement of the instrument. Significantly, none of the provisions cited bypetitioner categorically restricts or prohibits the issuance a duplicate orreplacement instrument sans compliance with the procedure outlined therein,and none establishes a mandatory precedent requirement therefor.

WHEREFORE, on the modified premises above set forth, the petition isDENIED and the appealed decision is hereby AFFIRMED.

G.R. No. 88866 February 18, 1991

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

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

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

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

CRUZ, J .:p

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

The Metropolitan Bank and Trust Co. is a commercial bank with branches

throughout the Philippines and even abroad. Golden Savings and Loan Association was, at the time these events happened, operating in Calapan,Mindoro, with the other private respondents as its principal officers.

In January 1979, a certain Eduardo Gomez opened an account with GoldenSavings and deposited over a period of two months 38 treasury warrants with atotal value of P1,755,228.37. They were all drawn by the Philippine FishMarketing Authority and purportedly signed by its General Manager andcountersigned by its Auditor. Six of these were directly payable to Gomez whilethe others appeared to have been indorsed by their respective payees, followedby Gomez as second indorser.

1

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

2

More than two weeks after the deposits, Gloria Castillo went to the Calapanbranch several times to ask whether the warrants had been cleared. She wastold to wait. Accordingly, Gomez was meanwhile not allowed to withdraw from hisaccount. Later, however, "exasperated" over Gloria's repeated inquiries and alsoas an accommodation for a "valued client," the petitioner says it finally decided toallow Golden Savings to withdraw from the proceeds of thewarrants.

3 The first withdrawal was made on July 9, 1979, in the amount of

P508,000.00, the second on July 13, 1979, in the amount of P310,000.00, andthe third on July 16, 1979, in the amount of P150,000.00. The total withdrawalwas P968.000.00.

4

In turn, Golden Savings subsequently allowed Gomez to make withdrawals fromhis own account, eventually collecting the total amount of P1,167,500.00 from theproceeds of the apparently cleared warrants. The last withdrawal was made onJuly 16, 1979.

On July 21, 1979, Metrobank informed Golden Savings that 32 of the warrantshad been dishonored by the Bureau of Treasury on July 19, 1979, anddemanded the refund by Golden Savings of the amount it had previouslywithdrawn, to make up the deficit in its account.

The demand was rejected. Metrobank then sued Golden Savings in the RegionaTrial Court of Mindoro.

5 After trial, judgment was rendered in favor of Golden

Savings, which, however, filed a motion for reconsideration even as Metrobankfiled its notice of appeal. On November 4, 1986, the lower court modified itsdecision thus:

ACCORDINGLY, judgment is hereby rendered:

1. Dismissing the complaint with costs against theplaintiff;

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

3. Directing the plaintiff to reverse its action of debitingSavings Account No. 2498 of the sum of P1,754,089.00and to reinstate and credit to such account such amountexisting before the debit was made including the amountof P812,033.37 in favor of defendant Golden Savings andLoan Association, Inc. and thereafter, to allow defendantGolden Savings and Loan Association, Inc. to withdrawthe amount outstanding thereon before the debit;

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4. Ordering the plaintiff to pay the defendant GoldenSavings and Loan Association, Inc. attorney's fees andexpenses of litigation in the amount of P200,000.00.

5. Ordering the plaintiff to pay the defendant SpousesMagno Castillo and Lucia Castillo attorney's fees andexpenses of litigation in the amount of P100,000.00.

SO ORDERED.

On appeal to the respondent court,6 the decision was affirmed, prompting

Metrobank to file this petition for review on the following grounds:

1. Respondent Court of Appeals erred in disregarding andfailing to apply the clear contractual terms and conditionson the deposit slips allowing Metrobank to charge backany amount erroneously credited.

(a) Metrobank's right to charge back is not limited toinstances where the checks or treasury warrants areforged or unauthorized.

(b) Until such time as Metrobank is actually paid, itsobligation is that of a mere collecting agent which cannotbe held liable for its failure to collect on the warrants.

2. Under the lower court's decision, affirmed byrespondent Court of Appeals, Metrobank is made to pay

for warrants already dishonored, thereby perpetuating thefraud committed by Eduardo Gomez.

3. Respondent Court of Appeals erred in not finding thatas between Metrobank and Golden Savings, the lattershould bear the loss.

4. Respondent Court of Appeals erred in holding that thetreasury warrants involved in this case are not negotiableinstruments.

The petition has no merit.

From the above undisputed facts, it would appear to the Court that Metrobankwas indeed negligent in giving Golden Savings the impression that the treasurywarrants had been cleared and that, consequently, it was safe to allow Gomez to

withdraw the proceeds thereof from his account with it. Without such assurance,Golden Savings would not have allowed the withdrawals; with such assurance,there was no reason not to allow the withdrawal. Indeed, Golden Savings mighteven have incurred liability for its refusal to return the money that to allappearances belonged to the depositor, who could therefore withdraw it any timeand for any reason he saw fit.

It was, in fact, to secure the clearance of the treasury warrants that GoldenSavings deposited them to its account with Metrobank. Golden Savings had noclearing facilities of its own. It relied on Metrobank to determine the validity of thewarrants through its own services. The proceeds of the warrants were withheldfrom Gomez until Metrobank allowed Golden Savings itself to withdraw themfrom its own deposit.

7 It was only when Metrobank gave the go-signal that

Gomez was finally allowed by Golden Savings to withdraw them f rom his ownaccount.

The argument of Metrobank that Golden Savings should have exercised more

care in checking the personal circumstances of Gomez before accepting hisdeposit does not hold water. It was Gomez who was entrusting the warrants, notGolden Savings that was extending him a loan; and moreover, the treasurywarrants were subject to clearing, pending which the depositor could notwithdraw its proceeds. There was no question of Gomez's identity or of thegenuineness of his signature as checked by Golden Savings. In fact, the treasurywarrants were dishonored allegedly because of the forgery of the signatures ofthe drawers, not of Gomez as payee or indorser. Under the circumstances, it isclear that Golden Savings acted with due care and diligence and cannot befaulted for the withdrawals it allowed Gomez to make.

By contrast, Metrobank exhibited extraordinary carelessness. The amountinvolved was not trifling— more than one and a half million pesos (and this was1979). There was no reason why it should not have waited until the treasurywarrants had been cleared; it would not have lost a single centavo by waiting.Yet, despite the lack of such clearance — and notwithstanding that it had notreceived a single centavo from the proceeds of the treasury warrants, as it nowrepeatedly stresses— it allowed Golden Savings to withdraw — not once, not

twice, but thrice— from the uncleared treasury warrants in the total amount ofP968,000.00

Its reason? It was "exasperated" over the persistent inquiries of Gloria Castilloabout the clearance and it also wanted to "accommodate" a valued client. It"presumed" that the warrants had been cleared simply because of "the lapse ofone week."

8 For a bank with its long experience, this explanation is unbelievably

naive.

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

Kindly note that in receiving items on deposit, the bankobligates itself only as the depositor's collecting agent,assuming no responsibility beyond care in selectingcorrespondents, and until such time as actual paymentshall have come into possession of this bank, the right isreserved to charge back to the depositor's account anyamount previously credited, whether or not such item isreturned. This also applies to checks drawn on localbanks and bankers and their branches as well as on thisbank, which are unpaid due to insufficiency of funds,forgery, unauthorized overdraft or any other reason.(Emphasis supplied.)

According to Metrobank, the said conditions clearly show that it was acting onlyas a collecting agent for Golden Savings and give it the right to "charge back tothe depositor's account any amount previously credited, whether or not such item

is returned. This also applies to checks ". . . which are unpaid due to insufficiencyof funds, forgery, unauthorized overdraft of any other reason." It is claimed thatthe said conditions are in the nature of contractual stipulations and becamebinding on Golden Savings when Gloria Castillo, as its Cashier, signed thedeposit slips.

Doubt may be expressed about the binding force of the conditions, consideringthat they have apparently been imposed by the bank unilaterally, without theconsent of the depositor. Indeed, it could be argued that the depositor, in signingthe deposit slip, does so only to identify himself and not to agree to the conditionsset forth in the given permit at the back of the deposit slip. We do not have to ruleon this matter at this time. At any rate, the Court feels that even if the deposit slipwere considered a contract, the petitioner could still not validly disclaimresponsibility thereunder in the light of the circumstances of this case.

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

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

The negligence of Metrobank has been sufficiently established. To repeat foremphasis, it was the clearance given by it that assured Golden Savings it wasalready safe to allow Gomez to withdraw the proceeds of the treasury warrantshe had deposited Metrobank misled Golden Savings. There may have been noexpress clearance, as Metrobank insists (although this is refuted by GoldenSavings) but in any case that clearance could be implied from its allowing GoldenSavings to withdraw from its account not only once or even twice but three timesThe total withdrawal was in excess of its original balance before the t reasurywarrants 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 warrantsare not paid for any reason is not acceptable. Any reason does not mean noreason at all. Otherwise, there would have been no need at all for GoldenSavings to deposit the treasury warrants with it for clearance. There would havebeen no need for it to wait until the warrants had been cleared before paying theproceeds thereof to Gomez. Such a condition, if interpreted in the way thepetitioner suggests, is not binding for being arbitrary and unconscionable. And itbecomes more so in the case at bar when it is considered that the supposeddishonor of the warrants was not communicated to Golden Savings before itmade its own payment to Gomez.

The belated notification aggravated the petitioner's earlier negligence in givingexpress or at least implied clearance to the treasury warrants and allowingpayments therefrom to Golden Savings. But that is not all. On top of this, thesupposed reason for the dishonor, to wit, the forgery of the signatures of thegeneral manager and the auditor of the drawer corporation, has not been

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established.9 This was the finding of the lower courts which we see no reason to

disturb. And as we said in MWSS v. Court of Appeals:10

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

A no less important consideration is the circumstance that the treasury warrantsin question are not negotiable instruments. Clearly stamped on their face is theword "non-negotiable." Moreover, and this is of equal significance, it is indicatedthat they are payable from a particular fund, to wit, Fund 501.

The following sections of the Negotiable Instruments Law, especially theunderscored parts, are pertinent:

Sec. 1.— Form of negotiable instruments.— Aninstrument to be negotiable must conform to the followingrequirements:

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

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

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

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

(e) Where the instrument is addressed to a drawee, hemust be named or otherwise indicated therein withreasonable certainty.

xxx xxx xxx

Sec. 3. When promise is unconditional .— An unqualifiedorder or promise to pay is unconditional within themeaning of this Act though coupled with—

(a) An indication of a particular fund out of whichreimbursement is to be made or a particular account to be

debited with the amount; or

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

But an order or promise to pay out of a particular fund isnot unconditional .

The indication of Fund 501 as the source of the payment to be made on thetreasury warrants makes the order or promise to pay "not unconditional" and thewarrants themselves non-negotiable. There should be no question that theexception 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:

The petitioner argues that he is a holder in good faith and

for value of a negotiable instrument and is entitled to therights and privileges of a holder in due course, free fromdefenses. But this treasury warrant is not within the scopeof the negotiable instrument law. For one thing, thedocument bearing on its face the words "payable from theappropriation for food administration, is actually an Orderfor payment out of "a particular fund," and is notunconditional and does not fulfill one of the essentialrequirements of a negotiable instrument (Sec. 3 lastsentence and section [1(b)] of the Negotiable InstrumentsLaw).

Metrobank cannot contend that by indorsing the warrants in general, GoldenSavings assumed that they were "genuine and in all respects what they purportto be," in accordance with Section 66 of the Negotiable Instruments Law. Thesimple reason is that this law is not applicable to the non-negotiable treasurywarrants. The indorsement was made by Gloria Castillo not for the purpose of

guaranteeing the genuineness of the warrants but merely to deposit them withMetrobank for clearing. It was in fact Metrobank that made the guarantee when itstamped on the back of the warrants: "All prior indorsement and/or lack ofendorsements guaranteed, Metropolitan Bank & Trust Co., Calapan Branch."

The petitioner lays heavy stress on Jai Alai Corporation v. Bank of the PhilippineIslands,

12 but we feel this case is inapplicable to the present controversy. That

case involved checks whereas this case involves treasury warrants. GoldenSavings never represented that the warrants were negotiable but signed themonly for the purpose of depositing them for clearance. Also, the fact of forgerywas proved in that case but not in the case before us. Finally, the Court found theJai Alai Corporation negligent in accepting the checks without question from one Antonio Ramirez notwithstanding that the payee was the Inter-Island Gas

Services, Inc. and it did not appear that he was authorized to indorse it. Nosimilar negligence can be imputed to Golden Savings.

We find the challenged decision to be basically correct. However, we will have toamend it insofar as it directs the petitioner to credit Golden Savings with the fullamount of the treasury checks deposited to its account.

The total value of the 32 treasury warrants dishonored was P1,754,089.00, fromwhich Gomez was allowed to withdraw P1,167,500.00 before Golden Savingswas notified of the dishonor. The amount he has withdrawn must be charged notto Golden Savings but to Metrobank, which must bear the consequences of itsown negligence. But the balance of P586,589.00 should be debited to GoldenSavings, as obviously Gomez can no longer be permitted to withdraw thisamount from his deposit because of the dishonor of the warrants. Gomez has infact disappeared. To also credit the balance to Golden Savings would undulyenrich it at the expense of Metrobank, let alone the fact that it has already beeninformed of the dishonor of the treasury warrants.

WHEREFORE, the challenged decision is AFFIRMED, with the modification thatParagraph 3 of the dispositive portion of the judgment of the lower court shall bereworded as follows:

3. Debiting Savings Account No. 2498 in the sum ofP586,589.00 only and thereafter allowing defendantGolden Savings & Loan Association, Inc. to withdraw theamount outstanding thereon, if any, after the debit.

SO ORDERED.

G.R. No. 89252 May 24, 1993

RAUL SESBREÑO, petitioner,

vs.

HON. COURT OF APPEALS, DELTA MOTORS CORPORATION ANDPILIPINAS BANK, respondents.

Salva, Villanueva & Associates for Delta Motors Corporation.

Reyes, Salazar & Associates for Pilipinas Bank.

FELICIANO, J.:

On 9 February 1981, petitioner Raul Sesbreño made a money market placementin the amount of P300,000.00 with the Philippine Underwriters FinanceCorporation ("Philfinance"), Cebu Branch; the placement, with a term of thirty-two(32) days, would mature on 13 March 1981, Philfinance, also on 9 February1981, issued the following documents to petitioner:

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

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

(c) post-dated checks payable on 13 March 1981 (i.e., the maturity dateof petitioner's investment), with petitioner as payee, Philfinance as drawer, andInsular Bank of Asia and America as drawee, in the total amount of P304,533.33.

On 13 March 1981, petitioner sought to encash the postdated checks issued byPhilfinance. However, the checks were dishonored for having been drawnagainst insufficient funds.

On 26 March 1981, Philfinance delivered to petitioner the DCR No. 10805 issuedby private respondent Pilipinas Bank ("Pilipinas"). It reads as follows:

PILIPINAS BANK

Makati Stock Exchange Bldg.,

Ayala Avenue, Makati,

Metro Manila

February 9, 1981

———————

VALUE DATE

TO Raul Sesbreño

April 6, 1981

————————

MATURITY DATE

NO. 10805

DENOMINATED CUSTODIAN RECEIPT

This confirms that as a duly Custodian Bank, and upon instruction of PHILIPPINEUNDERWRITES FINANCE CORPORATION, we have in our custody thefollowing securities to you [sic] the extent herein indicated.

SERIAL MAT. FACE ISSUED REGISTERED AMOUNT

NUMBER DATE VALUE BY HOLDER PAYEE

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

UNDERWRITERS

FINANCE CORP.

We further certify that these securities may be inspected by you or your dulyauthorized representative at any time during regular banking hours.

Upon your written instructions we shall undertake physical delivery of the abovesecurities fully assigned to you should this Denominated Custodianship Receiptremain outstanding in your favor thirty (30) days after its maturity.

PILIPINAS BANK

(By Elizabeth De Villa

Illegible Signature) 1

On 2 April 1981, petitioner approached Ms. Elizabeth de Villa of privaterespondent Pilipinas, Makati Branch, and handed her a demand letter informingthe bank that his placement with Philfinance in the amount reflected in the DCRNo. 10805 had remained unpaid and outstanding, and that he in effect wasasking for the physical delivery of the underlying promissory note. Petitioner thenexamined the original of the DMC PN No. 2731 and found: that the security hadbeen issued on 10 April 1980; that it would mature on 6 April 1981; that it had aface value of P2,300,833.33, with the Philfinance as "payee" and privaterespondent Delta Motors Corporation ("Delta") as "maker;" and that on face ofthe promissory note was stamped "NON NEGOTIABLE." Pilipinas did not deliverthe Note, nor any certificate of participation in respect thereof, to petitioner.

Petitioner later made similar demand letters, dated 3 July 1981 and 3 August1981, 2 again asking private respondent Pilipinas for physical delivery of theoriginal of DMC PN No. 2731. Pilipinas allegedly referred all of petitioner'sdemand letters to Philfinance for written instructions, as has been supposedly

agreed upon in "Securities Custodianship Agreement" between Pilipinas andPhilfinance. Philfinance did not provide the appropriate instructions; Pilipinasnever released DMC PN No. 2731, nor any other instrument in respect thereof, topetitioner.

Petitioner also made a written demand on 14 July 1981 3 upon privaterespondent Delta for the partial satisfaction of DMC PN No. 2731, explaining thatPhilfinance, as payee thereof, had assigned to him said Note to the extent ofP307,933.33. Delta, however, denied any liability to petitioner on the promissorynote, and explained in turn that it had previously agreed with Philfinance to offsetits DMC PN No. 2731 (along with DMC PN No. 2730) against Philfinance PN No143-A issued in favor of Delta.

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In the meantime, Philfinance, on 18 June 1981, was placed under the jointmanagement of the Securities and exchange commission ("SEC") and theCentral Bank. Pilipinas delivered to the SEC DMC PN No. 2731, which to dateapparently remains in the custody of the SEC. 4

As petitioner had failed to collect his investment and interest thereon, he filed on28 September 1982 an action for damages with the Regional Trial Court ("RTC")of Cebu City, Branch 21, against private respondents Delta and Pilipinas. 5 Thetrial court, in a decision dated 5 August 1987, dismissed the complaint andcounterclaims for lack of merit and for lack of cause of action, with costs againstpetitioner.

Petitioner appealed to respondent Court of Appeals in C.A.-G.R. CV No. 15195.In a Decision dated 21 March 1989, the Court of Appeals denied the appeal andheld: 6

Be that as it may, from the evidence on record, if there is anyone that appearsliable for the travails of plaintiff-appellant, it is Philfinance. As correctly observedby the trial court:

This act of Philfinance in accepting the investment of plaintiff and charging itagainst DMC PN No. 2731 when its entire face value was already obligated orearmarked for set-off or compensation is difficult to comprehend and may havebeen motivated with bad faith. Philfinance, therefore, is solely and legallyobligated to return the investment of plaintiff, together with its earnings, and toanswer all the damages plaintiff has suffered incident thereto. Unfortunately forplaintiff, Philfinance was not impleaded as one of the defendants in this case atbar; hence, this Court is without jurisdiction to pronounce judgement against it.(p. 11, Decision)

WHEREFORE, finding no reversible error in the decision appealed from, thesame is hereby affirmed in toto. Cost against plaintiff-appellant.

Petitioner moved for reconsideration of the above Decision, without success.

Hence, this Petition for Review on Certiorari.

After consideration of the allegations contained and issues raised in thepleadings, the Court resolved to give due course to the petition and required theparties to file their respective memoranda. 7

Petitioner reiterates the assignment of errors he directed at the trial courtdecision, and contends that respondent court of Appeals gravely erred: (i) inconcluding that he cannot recover from private respondent Delta his assignedportion of DMC PN No. 2731; (ii) in failing to hold private respondent Pilipinassolidarily liable on the DMC PN No. 2731 in view of the provisions stipulated inDCR No. 10805 issued in favor r of petitioner, and (iii) in refusing to pierce theveil of corporate entity between Philfinance, and private respondents Delta andPilipinas, considering that the three (3) entities belong to the "Silverio Group ofCompanies" under the leadership of Mr. Ricardo Silverio, Sr. 8

There are at least two (2) sets of relationships which we need to address: firstly,the relationship of petitioner vis-a-vis Delta; secondly, the relationship ofpetitioner in respect of Pilipinas. Actually, of course, there is a third relationship

that is of critical importance: the relationship of petitioner and Philfinance.However, since Philfinance has not been impleaded in this case, neither the trialcourt nor the Court of Appeals acquired jurisdiction over the person ofPhilfinance. It is, consequently, not necessary for present purposes to deal withthis third relationship, except to the extent it necessarily impinges upon orintersects the first and second relationships.

I.

We consider first the relationship between petitioner and Delta.

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

Nor could plaintiff-appellant have acquired any right over DMC PN No. 2731 asthe same is "non-negotiable" as stamped on its face (Exhibit "6"), negotiationbeing defined as the transfer of an instrument from one person to another so as

to constitute the transferee the holder of the instrument (Sec. 30, NegotiableInstruments Law). A person not a holder cannot sue on the instrument in his ownname and cannot demand or receive payment (Section 51, id.) 9

Petitioner admits that DMC PN No. 2731 was non-negotiable but contends thatthe Note had been validly transferred, in part to him by assignment and that as aresult of such transfer, Delta as debtor-maker of the Note, was obligated to paypetitioner the portion of that Note assigned to him by the payee Philfinance.

Delta, however, disputes petitioner's contention and argues:

(1) that DMC PN No. 2731 was not intended to be negotiated orotherwise transferred by Philfinance as manifested by the word "non-negotiable"stamp across the face of the Note 10 and because maker Delta and payeePhilfinance intended that this Note would be offset against the outstandingobligation of Philfinance represented by Philfinance PN No. 143-A issued toDelta as payee;

(2) that the assignment of DMC PN No. 2731 by Philfinance was withoutDelta's consent, if not against its instructions; and

(3) assuming (arguendo only) that the partial assignment in favor ofpetitioner was valid, petitioner took the Note subject to the defenses available toDelta, in particular, the offsetting of DMC PN No. 2731 against Philfinance PNNo. 143-A. 11

We consider Delta's arguments seriatim.

Firstly, it is important to bear in mind that the negotiation of a negotiableinstrument must be distinguished from the assignment or transfer of aninstrument whether that be negotiable or non-negotiable. Only an instrumentqualifying as a negotiable instrument under the relevant statute may be

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negotiated either by indorsement thereof coupled with delivery, or by deliveryalone where the negotiable instrument is in bearer form. A negotiable instrumentmay, however, instead of being negotiated, also be assigned or transferred. Thelegal consequences of negotiation as distinguished from assignment of anegotiable instrument are, of course, different. A non-negotiable instrument may,obviously, not be negotiated; but it may be assigned or transferred, absent anexpress prohibition against assignment or transfer written in the face of theinstrument:

The words "not negotiable," stamped on the face of the bill of lading, did notdestroy its assignability, but the sole effect was to exempt the bill from thestatutory provisions relative thereto, and a bill, though not negotiable, may betransferred by assignment; the assignee taking subject to the equities betweenthe original parties. 12 (Emphasis added)

DMC PN No. 2731, while marked "non-negotiable," was not at the same timestamped "non-transferable" or "non-assignable." It contained no stipulation whichprohibited Philfinance from assigning or transferring, in whole or in part, thatNote.

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

April 10, 1980

Philippine Underwriters Finance Corp.

Benavidez St., Makati,

Metro Manila.

Attention: Mr. Alfredo O. Banaria

SVP-Treasurer

GENTLEMEN:

This refers to our outstanding placement of P4,601,666.67 as evidenced by yourPromissory Note No. 143-A, dated April 10, 1980, to mature on April 6, 1981.

As agreed upon, we enclose our non-negotiable Promissory Note No. 2730 and2731 for P2,000,000.00 each, dated April 10, 1980, to be offsetted [sic] againstyour PN No. 143-A upon co-terminal maturity.

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

Very Truly Yours,

(Sgd.)

Florencio B. Biagan

Senior Vice President 13

We find nothing in his "Letter of Agreement" which can be reasonably construedas a prohibition upon Philfinance assigning or transferring all or part of DMC PNNo. 2731, before the maturity thereof. It is scarcely necessary to add that, evenhad this "Letter of Agreement" set forth an explicit prohibition of transfer uponPhilfinance, such a prohibition cannot be invoked against an assignee ortransferee of the Note who parted with valuable consideration in good faith andwithout notice of such prohibition. It is not disputed that petitioner was such anassignee or transferee. Our conclusion on this point is reinforced by the fact thatwhat Philfinance and Delta were doing by their exchange of their promissorynotes was this: Delta invested, by making a money market placement withPhilfinance, approximately P4,600,000.00 on 10 April 1980; but promptly, on thesame day, borrowed back the bulk of that placement, i.e., P4,000,000.00, byissuing its two (2) promissory notes: DMC PN No. 2730 and DMC PN No. 2731,both also dated 10 April 1980. Thus, Philfinance was left with not P4,600,000.00but only P600,000.00 in cash and the two (2) Delta promissory notes.

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

It is in fact difficult to be impressed with Delta's complaint, since it released itsDMC PN No. 2731 to Philfinance, an entity engaged in the business of buyingand selling debt instruments and other securities, and more generally, in moneymarket transactions. In Perez v. Court of Appeals, 17 the Court, speaking

through Mme. Justice Herrera, made the following important statement:

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

The impersonal character of the money market device overlooks the individualsor entities concerned. The issuer of a commercial paper in the money marketnecessarily knows in advance that it would be expenditiously transacted andtransferred to any investor/lender without need of notice to said issuer. Inpractice, no notification is given to the borrower or issuer of commercial paper ofthe sale or transfer to the investor.

xxx xxx xxx

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There is need to individuate a money market transaction, a relatively novelinstitution in the Philippine commercial scene. It has been intended to facilitatethe flow and acquisition of capital on an impersonal basis. And as specificallyrequired by Presidential Decree No. 678, the investing public must be givenadequate and effective protection in availing of the credit of a borrower in thecommercial paper market. 18 (Citations omitted; emphasis supplied)

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

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

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

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

(3) That the two debts are due;

(4) That they be liquidated and demandable;

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

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

As noted, the assignment to petitioner was made on 9 February 1981 or fromforty-nine (49) days before the "co-terminal maturity" date, that is to say, beforeany compensation had taken place. Further, the assignment to petitioner wouldhave prevented compensation had taken place between Philfinance and Delta, tothe extent of P304,533.33, because upon execution of the assignment in favor ofpetitioner, Philfinance and Delta would have ceased to be creditors and debtorsof each other in their own right to the extent of the amount assigned byPhilfinance to petitioner. Thus, we conclude that the assignment effected byPhilfinance in favor of petitioner was a valid one and that petitioner accordinglybecame owner of DMC PN No. 2731 to the extent of the portion thereof assignedto him.

The record shows, however, that petitioner notified Delta of the fact of theassignment to him only on 14 July 1981, 19 that is, after the maturity not only ofthe money market placement made by petitioner but also of both DMC PN No.2731 and Philfinance PN No. 143-A. In other words, petitioner notified Delta ofhis rights as assignee after compensation had taken place by operation of law

because the offsetting instruments had both reached maturity. It is a firmly settleddoctrine that the rights of an assignee are not any greater that the rights of theassignor, since the assignee is merely substituted in the place of the assignor 20and that the assignee acquires his rights subject to the equities— i.e., thedefenses— which the debtor could have set up against the original assignorbefore notice of the assignment was given to the debtor. Article 1285 of the CivilCode provides that:

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

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

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

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

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

At the time that Delta was first put to notice of the assignment in petitioner's favoon 14 July 1981, DMC PN No. 2731 had already been discharged bycompensation. Since the assignor Philfinance could not have then compelledpayment anew by Delta of DMC PN No. 2731, petitioner, as assignee ofPhilfinance, is similarly disabled from collecting from Delta the portion of the Noteassigned to him.

It bears some emphasis that petitioner could have notified Delta of theassignment or sale was effected on 9 February 1981. He could have notifiedDelta as soon as his money market placement matured on 13 March 1981without payment thereof being made by Philfinance; at that time, compensationhad yet to set in and discharge DMC PN No. 2731. Again petitioner could havenotified Delta on 26 March 1981 when petitioner received from Philfinance theDenominated Custodianship Receipt ("DCR") No. 10805 issued by privaterespondent Pilipinas in favor of petitioner. Petitioner could, in fine, have notifiedDelta at any time before the maturity date of DMC PN No. 2731. Becausepetitioner failed to do so, and because the record is bare of any indication thatPhilfinance had itself notified Delta of the assignment to petitioner, the Court iscompelled to uphold the defense of compensation raised by private respondentDelta. Of course, Philfinance remains liable to petitioner under the terms of theassignment made by Philfinance to petitioner.

II.

We turn now to the relationship between petitioner and private respondentPilipinas. Petitioner contends that Pilipinas became solidarily liable with

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Philfinance and Delta when Pilipinas issued DCR No. 10805 with the followingwords:

Upon your written instruction, we [Pilipinas] shall undertake physical delivery ofthe above securities fully assigned to you—. 23

The Court is not persuaded. We find nothing in the DCR that establishes an

obligation on the part of Pilipinas to pay petitioner the amount of P307,933.33 norany assumption of liability in solidum with Philfinance and Delta under DMC PNNo. 2731. We read the DCR as a confirmation on the part of Pilipinas that:

(1) it has in its custody, as duly constituted custodian bank, DMC PN No.2731 of a certain face value, to mature on 6 April 1981 and payable to the orderof Philfinance;

(2) Pilipinas was, from and after said date of the assignment byPhilfinance to petitioner (9 February 1981), holding that Note on behalf and forthe benefit of petitioner, at least to the extent it had been assigned to petitionerby payee Philfinance; 24

(3) petitioner may inspect the Note either "personally or by authorizedrepresentative", at any time during regular bank hours; and

(4) upon written instructions of petitioner, Pilipinas would physicallydeliver the DMC PN No. 2731 (or a participation therein to the extent ofP307,933.33) "should this Denominated Custodianship receipt remainoutstanding in [petitioner's] favor thirty (30) days after its maturity."

Thus, we find nothing written in printers ink on the DCR which could reasonablybe read as converting Pilipinas into an obligor under the terms of DMC PN No.2731 assigned to petitioner, either upon maturity thereof or any other time. Wenote that both in his complaint and in his testimony before the trial court,petitioner referred merely to the obligation of private respondent Pilipinas toeffect the physical delivery to him of DMC PN No. 2731. 25 Accordingly,petitioner's theory that Pilipinas had assumed a solidary obligation to pay theamount represented by a portion of the Note assigned to him by Philfinance,appears to be a new theory constructed only after the trial court had ruled againsthim. The solidary liability that petitioner seeks to impute Pilipinas cannot,however, be lightly inferred. Under article 1207 of the Civil Code, "there is asolidary liability only when the law or the nature of the obligation requiressolidarity," The record here exhibits no express assumption of solidary liabilityvis-a-vis petitioner, on the part of Pilipinas. Petitioner has not pointed to us to anylaw which imposed such liability upon Pilipinas nor has petitioner argued that thevery nature of the custodianship assumed by private respondent Pilipinasnecessarily implies solidary liability under the securities, custody of which wastaken by Pilipinas. Accordingly, we are unable to hold Pilipinas solidarily liablewith Philfinance and private respondent Delta under DMC PN No. 2731.

We do not, however, mean to suggest that Pilipinas has no responsibility andliability in respect of petitioner under the terms of the DCR. To the contrary, wefind, after prolonged analysis and deliberation, that private respondent Pilipinashad breached its undertaking under the DCR to petitioner Sesbreño.

We believe and so hold that a contract of deposit was constituted by the act ofPhilfinance in designating Pilipinas as custodian or depositary bank. Thedepositor was initially Philfinance; the obligation of the depository was owed,however, to petitioner Sesbreño as beneficiary of the custodianship or depository

agreement. We do not consider that this is a simple case of a stipulation pourautri. The custodianship or depositary agreement was established as an integralpart of the money market transaction entered into by petitioner with Philfinance.Petitioner bought a portion of DMC PN No. 2731; Philfinance as assignor-vendordeposited that Note with Pilipinas in order that the thing sold would be placedoutside the control of the vendor. Indeed, the constituting of the depositary orcustodianship agreement was equivalent to constructive delivery of the Note (tothe extent it had been sold or assigned to petitioner) to petitioner. It will be seenthat custodianship agreements are designed to facilitate transactions in themoney market by providing a basis for confidence on the part of the investors orplacers that the instruments bought by them are effectively taken out of thepocket, as it were, of the vendors and placed safely beyond their reach, thatthose instruments will be there available to the placers of funds should they haveneed of them. The depositary in a contract of deposit is obliged to return the

security or the thing deposited upon demand of the depositor (or, in thepresented case, of the beneficiary) of the contract, even though a term for suchreturn may have been established in the said contract. 26 Accordingly, anystipulation in the contract of deposit or custodianship that runs counter to thefundamental purpose of that agreement or which was not brought to the notice ofand accepted by the placer-beneficiary, cannot be enforced as against suchbeneficiary-placer.

We believe that the position taken above is supported by considerations of publicpolicy. If there is any party that needs the equalizing protection of the law inmoney market transactions, it is the members of the general public whom placetheir savings in such market for the purpose of generating interest revenues. 27The custodian bank, if it is not related either in terms of equity ownership ormanagement control to the borrower of the funds, or the commercial paperdealer, is normally a preferred or traditional banker of such borrower or dealer(here, Philfinance). The custodian bank would have every incentive to protect theinterest of its client the borrower or dealer as against the placer of funds. Theproviders of such funds must be safeguarded from the impact of stipulationsprivately made between the borrowers or dealers and the custodian banks, anddisclosed to fund-providers only after trouble has erupted.

In the case at bar, the custodian-depositary bank Pilipinas refused to deliver thesecurity deposited with it when petitioner first demanded physical delivery thereoon 2 April 1981. We must again note, in this connection, that on 2 April 1981,DMC PN No. 2731 had not yet matured and therefore, compensation or offsettingagainst Philfinance PN No. 143-A had not yet taken place. Instead of complyingwith the demand of the petitioner, Pilipinas purported to require and await theinstructions of Philfinance, in obvious contravention of its undertaking under theDCR to effect physical delivery of the Note upon receipt of "written instructions"from petitioner Sesbreño. The ostensible term written into the DCR (i.e., "shouldthis [DCR] remain outstanding in your favor thirty [30] days after its maturity")

was not a defense against petitioner's demand for physical surrender of the Noteon at least three grounds: firstly, such term was never brought to the attention ofpetitioner Sesbreño at the time the money market placement with Philfinancewas made; secondly, such term runs counter to the very purpose of thecustodianship or depositary agreement as an integral part of a money markettransaction; and thirdly, it is inconsistent with the provisions of Article 1988 of theCivil Code noted above. Indeed, in principle, petitioner became entitled todemand physical delivery of the Note held by Pilipinas as soon as petitioner'smoney market placement matured on 13 March 1981 without payment fromPhilfinance.

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

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

III.

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

In the first place, as already noted, jurisdiction over the person of Philfinance wasnever acquired either by the trial court nor by the respondent Court of Appeals.Petitioner similarly did not seek to implead Philfinance in the Petition before us.

Secondly, it is not disputed that Philfinance and private respondents Delta andPilipinas have been organized as separate corporate entities. Petitioner asks usto pierce their separate corporate entities, but has been able only to cite thepresence of a common Director — Mr. Ricardo Silverio, Sr., sitting on the Boardof Directors of all three (3) companies. Petitioner has neither alleged nor provedthat one or another of the three (3) concededly related companies used the othertwo (2) as mere alter egos or that the corporate affairs of the other two (2) wereadministered and managed for the benefit of one. There is simply not enoughevidence of record to justify disregarding the separate corporate personalities ofdelta and Pilipinas and to hold them liable for any assumed or undeterminedliability of Philfinance to petitioner. 28

WHEREFORE, for all the foregoing, the Decision and Resolution of the Court of Appeals in C.A.-G.R. CV No. 15195 dated 21 march 1989 and 17 July 1989,respectively, are hereby MODIFIED and SET ASIDE, to the extent that suchDecision and Resolution had dismissed petitioner's complaint against PilipinasBank. Private respondent Pilipinas bank is hereby ORDERED to indemnifypetitioner for damages in the amount of P304,533.33, plus legal interest thereonat the rate of six percent (6%) per annum counted from 2 April 1981. As somodified, the Decision and Resolution of the Court of Appeals are hereby AFFIRMED. No pronouncement as to costs.

G.R. No. 113236 March 5, 2001

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

QUISUMBING, J .:

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

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

. . . [D]efendant is a banking corporation. It operates under acertificate of authority issued by the Central Bank of the Philippines,and among its activities, accepts savings and time deposits. Saiddefendant had as one of its client-depositors the Fojas-ArcaEnterprises Company ("Fojas-Arca" for brevity). Fojas-Arcamaintaining a special savings account with the defendant, the latterauthorized and allowed withdrawals of funds therefrom through the

medium of special withdrawal slips. These are supplied by thedefendant to Fojas-Arca.

In January 1978, plaintiff and Fojas-Arca entered into a "FranchisedDealership Agreement" (Exh. B) whereby Fojas-Arca has theprivilege to purchase on credit and sell plaintiff's products.

On January 14, 1978 up to May 15, 1978. Pursuant to the aforesaid Agreement, Fojas-Arca purchased on credit Firestone products fromplaintiff with a total amount of P4,896,000.00. In payment of thesepurchases, Fojas-Arca delivered to plaintiff six (6) special withdrawalslips drawn upon the defendant. In turn, these were deposited by theplaintiff with its current account with the Citibank. All of them werehonored and paid by the defendant. This singular circumstance madeplaintiff believe [sic] and relied [sic] on the fact that the succeedingspecial withdrawal slips drawn upon the defendant would be equallysufficiently funded. Relying on such confidence and belief and as a

direct consequence thereof, plaintiff extended to Fojas-Arca otherpurchases on credit of its products.

On the following dates Fojas-Arca purchased Firestone products oncredit (Exh. M, I, J, K) and delivered to plaintiff the correspondingspecial withdrawal slips in payment thereof drawn upon thedefendant, to wit:

DATE WITHDRAWAL SLIP NO.

June 15, 1978 42127

July 15, 1978 42128

Aug. 15, 1978 42129

Sep. 15, 1978 42130

These were likewise deposited by plaintiff in its current account withCitibank and in turn the Citibank forwarded it [sic] to the defendant forpayment and collection, as it had done in respect of the previousspecial withdrawal slips. Out of these four (4) withdrawal slips onlywithdrawal slip No. 42130 in the amount of P981,500.00 was honoredand paid by the defendant in October 1978. Because of the absencefor a long period coupled with the fact that defendant honored andpaid withdrawal slips No. 42128 dated July 15, 1978, in the amount oP981,500.00 plaintiff's belief was all the more strengthened that theother withdrawal slips were likewise sufficiently funded, and that ithad received full value and payment of Fojas-Arca's credit purchasedthen outstanding at the time. On this basis, plaintiff was induced tocontinue extending to Fojas-Arca further purchase on credit of itsproducts as per agreement (Exh. "B").

However, on December 14, 1978, plaintiff was informed by Citibankthat special withdrawal slips No. 42127 dated June 15, 1978 forP1,198,092.80 and No. 42129 dated August 15, 1978 forP880,000.00 were dishonored and not paid for the reason 'NO ARRANGEMENT.' As a consequence, the Citibank debited plaintiff'saccount for the total sum of P2,078,092.80 representing theaggregate amount of the above-two special withdrawal slips. Undersuch situation, plaintiff averred that the pecuniary losses it suffered iscaused by and directly attributable to defendant's gross negligence.

On September 25, 1979, counsel of plaintiff served a written demandupon the defendant for the satisfaction of the damages suffered by it. And due to defendant's refusal to pay plaintiff's claim, plaintiff hasbeen constrained to file this complaint, thereby compelling plaintiff toincur litigation expenses and attorney's fees which amount arerecoverable from the defendant.

Controverting the foregoing asseverations of plaintiff, defendantasserted, inter alia that the transactions mentioned by plaintiff are thaof plaintiff and Fojas-Arca only, [in] which defendant is not involved;Vehemently, it was denied by defendant that the special withdrawalslips were honored and treated as if it were checks, the t ruth beingthat when the special withdrawal slips were received by defendant, itonly verified whether or not the signatures therein were authentic,and whether or not the deposit level in the passbook concurred withthe savings ledger, and whether or not the deposit is sufficient tocover the withdrawal; if plaintiff treated the special withdrawal slipspaid by Fojas-Arca as checks then plaintiff has to blame itself forbeing grossly negligent in treating the withdrawal slips as check whenit is clearly stated therein that the withdrawal slips are non-negotiablethat defendant is not a privy to any of the transactions between Fojas Arca and plaintiff for which reason defendant is not duty bound tonotify nor give notice of anything to plaintiff. If at first defendant hadgiven notice to plaintiff it is merely an extension of usual bankcourtesy to a prospective client; that defendant is only dealing with its

depositor Fojas-Arca and not the plaintiff. In summation, defendantcategorically stated that plaintiff has no cause of action against it (pp.1-3, Dec.; pp. 368-370, id ).

3

Petitioner's complaint4 for a sum of money and damages with the Regional Trial

Court of Pasay City, Branch 113, docketed as Civil Case No. 29546, wasdismissed together with the counterclaim of defendant.

Petitioner appealed the decision to the Court of Appeals. It averred thatrespondent Luzon Development Bank was liable for damages under Article2176

5 in relation to Articles 19

6 and 20

7 of the Civil Code. As noted by the CA,

petitioner alleged the following tortious acts on the part of private respondent: 1)the acceptance and payment of the special withdrawal slips without thepresentation of the depositor's passbook thereby giving the impression that thewithdrawal slips are instruments payable upon presentment; 2) giving the specialwithdrawal slips the general appearance of checks; and 3) the failure of

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respondent bank to seasonably warn petitioner that it would not honor two of thefour special withdrawal slips.

On December 29, 1993, the Court of Appeals promulgated its assailed decision.It denied the appeal and affirmed the judgment of the trial court. According to theappellate court, respondent bank notified the depositor to present the passbookwhenever it received a collection note from another bank, belying petitioner'sclaim that respondent bank was negligent in not requiring a passbook under thesubject transaction. The appellate court also found that the special withdrawalslips in question were not purposely given the appearance of checks, contrary topetitioner's assertions, and thus should not have been mistaken for checks.Lastly, the appellate court ruled that the respondent bank was under noobligation to inform petitioner of the dishonor of the special withdrawal slips, for

to do so would have been a violation of the law on the secrecy of bank deposits.

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

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

8

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

The initial transaction in this case was between petitioner and Fojas-Arca,whereby the latter purchased tires f rom the former with special withdrawal slips

drawn upon Fojas-Arca's special savings account with respondent bank.Petitioner in turn deposited these withdrawal slips with Citibank. The lattercredited the same to petitioner's current account, then presented the slips forpayment to respondent bank. It was at this point that the bone of contentionarose.

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

At the outset, we note that petitioner admits that the withdrawal slips in questionwere non-negotiable.

9 Hence, the rules governing the giving of immediate notice

of dishonor of negotiable instruments do not apply in this case.10

Petitioner itselfconcedes this point.

11 Thus, respondent bank was under no obligation to give

immediate notice that it would not make payment on the subject withdrawal slips.Citibank should have known that withdrawal slips were not negotiableinstruments. It could not expect these slips to be treated as checks by otherentities. Payment or notice of dishonor from respondent bank could not beexpected immediately, in contrast to the situation involving checks.

In the case at bar, it appears that Citibank, with the knowledge that respondentLuzon Development Bank, had honored and paid the previous withdrawal slips,automatically credited petitioner's current account with the amount of the subjectwithdrawal slips, then merely waited for the same to be honored and paid byrespondent bank. It presumed that the withdrawal slips were "good."

It bears stressing that Citibank could not have missed the non-negotiable natureof the withdrawal slips. The essence of negotiability which characterizes anegotiable paper as a credit instrument lies in its freedom to circulate freely as asubstitute for money.

12 The withdrawal slips in question lacked this character.

A bank is under obligation to treat the accounts of its depositors with meticulouscare, whether such account consists only of a few hundred pesos or of millions ofpesos.

13 The fact that the other withdrawal slips were honored and paid by

respondent bank was no license for Citibank to presume that subsequent slipswould be honored and paid immediately. By doing so, it failed in its fiduciary dutyto treat the accounts of its clients with the highest degree of care.

14

In the ordinary and usual course of banking operations, current account depositsare accepted by the bank on the basis of deposit slips prepared and signed bythe depositor, or the latter's agent or representative, who indicates therein thecurrent account number to which the deposit is to be credited, the name of thedepositor or current account holder, the date of the deposit, and the amount ofthe deposit either in cash or in check .

15

The withdrawal slips deposited with petitioner's current account with Citibankwere not checks, as petitioner admits. Citibank was not bound to accept the

withdrawal slips as a valid mode of deposit. But having erroneously acceptedthem as such, Citibank — and petitioner as account-holder— must bear the risksattendant to the acceptance of these instruments. Petitioner and Citibank couldnot now shift the risk and hold private respondent liable for their admittedmistake.

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

Documents

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