Full Text Comm Law 1

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G.R. No. 74886 December 8, 1992

PRUDENTIAL BANK, petitioner,

vs.

INTERMEDIATE APPELLATE COURT, PHILIPPINE RAYON MILLS, INC.

and ANACLETO R. CHI, respondents.

DAVIDE, JR.,J.:

Petitioner seeks to review and set aside the decision1of public

respondent; Intermediate Appellate Court (now Court of Appeals),

dated 10 March 1986, in AC-G.R. No. 66733 which affirmed in

totothe 15 June 1978 decision of Branch 9 (Quezon City) of the then

Court of First Instance (now Regional Trial Court) of Rizal in Civil

Case No. Q-19312. The latter involved an action instituted by the

petitioner for the recovery of a sum of money representing the

amount paid by it to the Nissho Company Ltd. of Japan for textile

machinery imported by the defendant, now private respondent,

Philippine Rayon Mills, Inc. (hereinafter Philippine Rayon),

represented by co-defendant Anacleto R. Chi.

The facts which gave rise to the instant controversy are summarized

by the public respondent as follows:

On August 8, 1962, defendant-appellant Philippine

Rayon Mills, Inc. entered into a contract with Nissho

Co., Ltd. of Japan for the importation of textile

machineries under a five-year deferred payment

plan (Exhibit B, Plaintiff's Folder of Exhibits, p 2). To

effect payment for said machineries, the defendant-

appellant applied for a commercial letter of credit

with the Prudential Bank and Trust Company in

favor of Nissho. By virtue of said application, the

Prudential Bank opened Letter of Credit No. DPP-

63762 for $128,548.78 (Exhibit A, Ibid., p. 1).

Against this letter of credit, drafts were drawn and

issued by Nissho (Exhibits X, X-1 to X-11, Ibid., pp.

65, 66 to 76), which were all paid by the Prudential

Bank through its correspondent in Japan, the Bank

of Tokyo, Ltd. As indicated on their faces, two of

these drafts (Exhibit X and X-1, Ibid., pp. 65-66)

were accepted by the defendant-appellant through

its president, Anacleto R. Chi, while the others were

not (Exhibits X-2 to X-11, Ibid., pp. 66 to 76).

Upon the arrival of the machineries, the Prudential

Bank indorsed the shipping documents to the

defendant-appellant which accepted delivery of thesame. To enable the defendant-appellant to take

delivery of the machineries, it executed, by prior

arrangement with the Prudential Bank, a trust

receipt which was signed by Anacleto R. Chi in his

capacity as President (sic) of defendant-appellant

company (Exhibit C, Ibid., p. 13).

At the back of the trust receipt is a printed form to

be accomplished by two sureties who, by the very

terms and conditions thereof, were to be jointly andseverally liable to the Prudential Bank should the

defendant-appellant fail to pay the total amount or

any portion of the drafts issued by Nissho and paid

for by Prudential Bank. The defendant-appellant

was able to take delivery of the textile machineries

and installed the same at its factory site at 69

Obudan Street, Quezon City.


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Civil Code and the related evidence and jurisprudence which

provide that such liability had already attached; (f) contravening the

judicial admissions of Philippine Rayon with respect to its liability to

pay the petitioner the amounts involved in the drafts (Exhibits "X",

"X-l" to "X-11''); and (g) interpreting "sight" drafts as requiring

acceptance by Philippine Rayon before the latter could be held

liable thereon. 4

In its decision, public respondent sustained the trial court in all

respects. As to the first and last assigned errors, it ruled that the

provision on unjust enrichment, Article 2142 of the Civil Code,

applies only if there is no express contract between the parties and

there is a clear showing that the payment is justified. In the instant

case, the relationship existing between the petitioner and Philippine

Rayon is governed by specific contracts, namely the application for

letters of credit, the promissory note, the drafts and the trustreceipt. With respect to the last ten (10) drafts (Exhibits "X-2" to "X-

11") which had not been presented to and were not accepted by

Philippine Rayon, petitioner was not justified in unilaterally paying

the amounts stated therein. The public respondent did not agree

with the petitioner's claim that the drafts were sight drafts which

did not require presentment for acceptance to Philippine Rayon

because paragraph 8 of the trust receipt presupposes prior

acceptance of the drafts. Since the ten (10) drafts were not

presented and accepted, no valid demand for payment can be

made.

Public respondent also disagreed with the petitioner's contention

that private respondent Chi is solidarily liable with Philippine Rayon

pursuant to Section 13 of P.D. No. 115 and based on his signature

on the solidary guaranty clause at the dorsal side of the trust

receipt. As to the first contention, the public respondent ruled that

the civil liability provided for in said Section 13 attaches only after

conviction. As to the second, it expressed misgivings as to whether

Chi's signature on the trust receipt made the latter automatically

liable thereon because the so-called solidary guaranty clause at the

dorsal portion of the trust receipt is to be signed not by one (1)

person alone, but by two (2) persons; the last sentence of the same

is incomplete and unsigned by witnesses; and it is not

acknowledged before a notary public. Besides, even granting that it

was executed and acknowledged before a notary public, Chi cannot

be held liable therefor because the records fail to show that

petitioner had either exhausted the properties of Philippine Rayon

or had resorted to all legal remedies as required in Article 2058 of

the Civil Code. As provided for under Articles 2052 and 2054 of the

Civil Code, the obligation of a guarantor is merely accessory and

subsidiary, respectively. Chi's liability would therefore arise only

when the principal debtor fails to comply with his obligation. 5

Its motion to reconsider the decision having been denied by thepublic respondent in its Resolution of 11 June 1986, 6petitioner

filed the instant petition on 31 July 1986 submitting the following

legal issues:

I. WHETHER OR NOT THE RESPONDENT APPELLATE

COURT GRIEVOUSLY ERRED IN DENYING

PETITIONER'S CLAIM FOR FULL REIMBURSEMENT

AGAINST THE PRIVATE RESPONDENTS FOR THE

PAYMENT PETITIONER MADE TO NISSHO CO. LTD.

FOR THE BENEFIT OF PRIVATE RESPONDENT UNDERART. 1283 OF THE NEW CIVIL CODE OF THE

PHILIPPINES AND UNDER THE GENERAL PRINCIPLE

AGAINST UNJUST ENRICHMENT;

II. WHETHER OR NOT RESPONDENT CHI IS

SOLIDARILY LIABLE UNDER THE TRUST RECEIPT

(EXH. C);


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III. WHETHER OR NOT ON THE BASIS OF THE

JUDICIAL ADMISSIONS OF RESPONDENT CHI HE IS

LIABLE THEREON AND TO WHAT EXTENT;

IV. WHETHER OR NOT RESPONDENT CHI IS MERELY

A SIMPLE GUARANTOR; AND IF SO; HAS HIS

LIABILITY AS SUCH ALREADY ATTACHED;

V. WHETHER OR NOT AS THE SIGNATORY AND

RESPONSIBLE OFFICER OF RESPONDENT PHIL.

RAYON RESPONDENT CHI IS PERSONALLY LIABLE

PURSUANT TO THE PROVISION OF SECTION 13, P.D.

115;

VI. WHETHER OR NOT RESPONDENT PHIL. RAYON IS

LIABLE TO THE PETITIONER UNDER THE TRUSTRECEIPT (EXH. C);

VII. WHETHER OR NOT ON THE BASIS OF THE

JUDICIAL ADMISSIONS RESPONDENT PHIL. RAYON IS

LIABLE TO THE PETITIONER UNDER THE DRAFTS

(EXHS. X, X-1 TO X-11) AND TO WHAT EXTENT;

VIII. WHETHER OR NOT SIGHT DRAFTS REQUIRE

PRIOR ACCEPTANCE FROM RESPONDENT PHIL.

RAYON BEFORE THE LATTER BECOMES LIABLE TOPETITIONER. 7

In the Resolution of 12 March 1990, 8 this Court gave due course to

the petition after the filing of the Comment thereto by private

respondent Anacleto Chi and of the Reply to the latter by the

petitioner; both parties were also required to submit their

respective memoranda which they subsequently complied with.

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

1. Whether presentment for

acceptance of the drafts was

indispensable to make Philippine

Rayon liable thereon;

2. Whether Philippine Rayon is

liable on the basis of the trust

receipt;

3. Whether private respondent Chi

is jointly and severally liable with

Philippine Rayon for the obligation

sought to be enforced and if not,

whether he may be considered aguarantor; in the latter situation,

whether the case should have been

dismissed on the ground of lack of

cause of action as there was no

prior exhaustion of Philippine

Rayon's properties.

Both the trial court and the public respondent ruled that Philippine

Rayon could be held liable for the two (2) drafts, Exhibits "X" and "X-

1", because only these appear to have been accepted by the latterafter due presentment. The liability for the remaining ten (10) drafts

(Exhibits "X-2" to "X-11" inclusive) did not arise because the same

were not presented for acceptance. In short, both courts concluded

that acceptance of the drafts by Philippine Rayon was indispensable

to make the latter liable thereon. We are unable to agree with this

proposition. The transaction in the case at bar stemmed from

Philippine Rayon's application for a commercial letter of credit with

the petitioner in the amount of $128,548.78 to cover the former's


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contract to purchase and import loom and textile machinery from

Nissho Company, Ltd. of Japan under a five-year deferred payment

plan. Petitioner approved the application. As correctly ruled by the

trial court in its Order of 6 March 1975: 9

. . . By virtue of said Application and Agreement for

Commercial Letter of Credit, plaintiff bank10

was

under obligation to pay through its correspondent

bank in Japan the drafts that Nisso (sic) Company,

Ltd., periodically drew against said letter of credit

from 1963 to 1968, pursuant to plaintiff's contract

with the defendant Philippine Rayon Mills, Inc. In

turn, defendant Philippine Rayon Mills, Inc., was

obligated to pay plaintiff bank the amounts of the

drafts drawn by Nisso (sic) Company, Ltd. against

said plaintiff bank together with any accruingcommercial charges, interest, etc. pursuant to the

terms and conditions stipulated in the Application

and Agreement of Commercial Letter of Credit

Annex "A".

A letter of credit is defined as an engagement by a bank or other

person made at the request of a customer that the issuer will honor

drafts or other demands for payment upon compliance with the

conditions specified in the credit. 11Through a letter of credit, the

bank merely substitutes its own promise to pay for one of itscustomers who in return promises to pay the bank the amount of

funds mentioned in the letter of credit plus credit or commitment

fees mutually agreed upon.12

In the instant case then, the drawee

was necessarily the herein petitioner. It was to the latter that the

drafts were presented for payment. In fact, there was no need for

acceptance as the issued drafts are sight drafts. Presentment for

acceptance is necessary only in the cases expressly provided for in

Section 143 of the Negotiable Instruments Law (NIL).13

The said

section reads:

Sec. 143. When presentment for acceptance must

be made. Presentment for acceptance must be

made:

(a) Where the bill is

payable after sight,

or in any other

case, where

presentment for

acceptance is

necessary in order

to fix the maturity

of the instrument;or

(b) Where the bill

expressly stipulates

that it shall be

presented for

acceptance; or

(c) Where the bill is

drawn payableelsewhere than at

the residence or

place of business of

the drawee.

In no other case is presentment for acceptance

necessary in order to render any party to the bill

liable.


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Obviously then, sight draftsdo not require presentment for

acceptance.

The acceptance of a bill is the signification by the drawee of his

assent to the order of the drawer; 14this may be done in writing by

the drawee in the bill itself, or in a separate instrument. 15

The parties herein agree, and the trial court explicitly ruled, that the

subject, drafts are sight drafts. Said the latter:

. . . In the instant case the drafts being at sight, they

are supposed to be payable upon acceptance unless

plaintiff bank has given the Philippine Rayon Mills

Inc. time within which to pay the same. The first

two drafts (Annexes C & D, Exh. X & X-1) were duly

accepted as indicated on their face (sic), and uponsuch acceptance should have been paid forthwith.

These two drafts were not paid and although

Philippine Rayon Mills

ought to have paid the same, the fact remains that

until now they are still unpaid.16

Corollarily, they are, pursuant to Section 7 of the NIL, payable on

demand. Section 7 provides:

Sec. 7. When payable on demand. An instrumentis payable on demand

(a) When so it is

expressed to be

payable on

demand, or at sight,

or on presentation;

or

(b) In which no time

for payment in

expressed.

Where an instrument is issued, accepted, or

indorsed when overdue, it is, as regards the person

so issuing, accepting, or indorsing it, payable on

demand. (emphasis supplied)

Paragraph 8 of the Trust Receipt which reads: "My/our

liability for payment at maturity of any accepted draft, bill

of exchange or indebtedness shall not be extinguished or

modified"17

does not, contrary to the holding of the public

respondent, contemplate prior acceptance by Philippine

Rayon, but by the petitioner. Acceptance, however, was not

even necessary in the first place because the drafts whichwere eventually issued were sight drafts And even if these

were not sight drafts, thereby necessitating acceptance, it

would be the petitioner and not Philippine Rayon

which had to accept the same for the latter was not the

drawee. Presentment for acceptance is defined an the

production of a bill of exchange to a drawee for

acceptance. 18The trial court and the public respondent,

therefore, erred in ruling that presentment for acceptance

was an indispensable requisite for Philippine Rayon's

liability on the drafts to attach. Contrary to both courts'pronouncements, Philippine Rayon immediately became

liable thereon upon petitioner's payment thereof. Such is

the essence of the letter of credit issued by the petitioner. A

different conclusion would violate the principle upon which

commercial letters of credit are founded because in such a

case, both the beneficiary and the issuer, Nissho Company

Ltd. and the petitioner, respectively, would be placed at the

mercy of Philippine Rayon even if the latter had already


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received the imported machinery and the petitioner had

fully paid for it. The typical setting and purpose of a letter of

credit are described in Hibernia Bank and Trust

Co.vs.J.Aron & Co., Inc., 19thus:

Commercial letters of credit have come into general

use in international sales transactions where much

time necessarily elapses between the sale and the

receipt by a purchaser of the merchandise, during

which interval great price changes may occur.

Buyers and sellers struggle for the advantage of

position. The seller is desirous of being paid as

surely and as soon as possible, realizing that the

vendee at a distant point has it in his power to

reject on trivial grounds merchandise on arrival, and

cause considerable hardship to the shipper. Lettersof credit meet this condition by affording celerity

and certainty of payment. Their purpose is to insure

to a seller payment of a definite amount upon

presentation of documents. The bank deals only

with documents. It has nothing to do with the

quality of the merchandise. Disputes as to the

merchandise shipped may arise and be litigated

later between vendor and vendee, but they may not

impede acceptance of drafts and payment by the

issuing bank when the proper documents arepresented.

The trial court and the public respondent likewise erred in

disregarding the trust receipt and in not holding that Philippine

Rayon was liable thereon. In People vs.Yu Chai Ho, 20this Court

explains the nature of a trust receipt by quoting In re Dunlap Carpet

Co., 21thus:

By this arrangement a banker advances money to

an intending importer, and thereby lends the aid of

capital, of credit, or of business facilities and

agencies abroad, to the enterprise of foreign

commerce. Much of this trade could hardly be

carried on by any other means, and therefore it is of

the first importance that the fundamental factor in

the transaction, the banker's advance of money and

credit, should receive the amplest protection.

Accordingly, in order to secure that the banker shall

be repaid at the critical point that is, when the

imported goods finally reach the hands of the

intended vendee the banker takes the full title to

the goods at the very beginning; he takes it as soon

as the goods are bought and settled for by his

payments or acceptances in the foreign country,and he continues to hold that title as his

indispensable security until the goods are sold in

the United States and the vendee is called upon to

pay for them. This security is not an ordinary pledge

by the importer to the banker, for the importer has

never owned the goods, and moreover he is not

able to deliver the possession; but the security is

the complete title vested originally in the bankers,

and this characteristic of the transaction has again

and again been recognized and protected by thecourts. Of course, the title is at bottom a security

title, as it has sometimes been called, and the

banker is always under the obligation to reconvey;

but only after his advances have been fully repaid

and after the importer has fulfilled the other terms

of the contract.


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We also conclude, for the reason hereinafter discussed, and not for

that adduced by the public respondent, that private respondent

Chi's signature in the dorsal portion of the trust receipt did not bind

him solidarily with Philippine Rayon. The statement at the dorsal

portion of the said trust receipt, which petitioner describes as a

"solidary guaranty clause", reads:

In consideration of the PRUDENTIAL BANK AND

TRUST COMPANY complying with the foregoing, we

jointly and severally agree and undertake to pay on

demand to the PRUDENTIAL BANK AND TRUST

COMPANY all sums of money which the said

PRUDENTIAL BANK AND TRUST COMPANY may call

upon us to pay arising out of or pertaining to,

and/or in any event connected with the default of

and/or non-fulfillment in any respect of theundertaking of the aforesaid:

PHILIPPINE RAYON MILLS, INC.

We further agree that the PRUDENTIAL BANK AND

TRUST COMPANY does not have to take any steps

or exhaust its remedy against aforesaid:

before making demand on me/us.

(

S

g

d

.

)

A


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Petitioner insists that by virtue of the clear wording of the

statement, specifically the clause ". . . we jointly and severally agree

and undertake . . .," and the concluding sentence on exhaustion,

Chi's liability therein is solidary.

In holding otherwise, the public respondent ratiocinates as follows:

With respect to the second argument, we have our

misgivings as to whether the mere signature of

defendant-appellee Chi of (sic) the guaranty

agreement, Exhibit "C-1", will make it an actionable

document. It should be noted that Exhibit "C-1" was

prepared and printed by the plaintiff-appellant. A

perusal of Exhibit "C-1" shows that it was to be

signed and executed by two persons. It was signed

only by defendant-appellee Chi. Exhibit "C-1" was tobe witnessed by two persons, but no one signed in

that capacity. The last sentence of the guaranty

clause is incomplete. Furthermore, the plaintiff-

appellant also failed to have the purported

guarantee clause acknowledged before a notary

public. All these show that the alleged guaranty

provision was disregarded and, therefore, not

consummated.

But granting arguendothat the guaranty provisionin Exhibit "C-1" was fully executed and

acknowledged still defendant-appellee Chi cannot

be held liable thereunder because the records show

that the plaintiff-appellant had neither exhausted

the property of the defendant-appellant nor had it

resorted to all legal remedies against the said

defendant-appellant as provided in Article 2058 of

the Civil Code. The obligation of a guarantor is

merely accessory under Article 2052 of the Civil

Code and subsidiary under Article 2054 of the Civil

Code. Therefore, the liability of the defendant-

appellee arises only when the principal debtor fails

to comply with his obligation.27

Our own reading of the questioned solidary guaranty clause yields

no other conclusion than that the obligation of Chi is only that of

a guarantor. This is further bolstered by the last sentence which

speaks of waiver of exhaustion, which, nevertheless, is ineffective in

this case because the space therein for the party whose property

may not be exhausted was not filled up. Under Article 2058 of the

Civil Code, the defense of exhaustion (excussion) may be raised by a

guarantor before he may be held liable for the obligation. Petitioner

likewise admits that the questioned provision is a solidary guaranty

clause, thereby clearly distinguishing it from a contract of surety. It,however, described the guaranty as solidary between the

guarantors; this would have been correct if two (2) guarantors had

signed it. The clause "we jointly and severally agree and undertake"

refers to the undertaking of the two (2) parties who are to sign it or

to the liability existing between themselves. It does not refer to the

undertaking between either one or both of them on the one hand

and the petitioner on the other with respect to the liability

described under the trust receipt. Elsewise stated, their liability is

not divisible as between them, i.e., it can be enforced to its full

extent against any one of them.

Furthermore, any doubt as to the import, or true intent of the

solidary guaranty clause should be resolved against the petitioner.

The trust receipt, together with the questioned solidary guaranty

clause, is on a form drafted and prepared solely by the petitioner;

Chi's participation therein is limited to the affixing of his signature

thereon. It is, therefore, a contract of adhesion; 28as such, it must


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be strictly construed against the party responsible for its

preparation. 29

Neither can We agree with the reasoning of the public respondent

that this solidary guaranty clause was effectively disregarded simply

because it was not signed and witnessed by two (2) persons and

acknowledged before a notary public. While indeed, the clause

ought to have been signed by two (2) guarantors, the fact that it

was only Chi who signed the same did not make his act an idle

ceremony or render the clause totally meaningless. By his signing,

Chi became the sole guarantor. The attestation by witnesses and

the acknowledgement before a notary public are not required by

law to make a party liable on the instrument. The rule is that

contracts shall be obligatory in whatever form they may have been

entered into, provided all the essential requisites for their validity

are present; however, when the law requires that a contract be insome form in order that it may be valid or enforceable, or that it be

proved in a certain way, that requirement is absolute and

indispensable.30

With respect to a guaranty,31

which is a promise to

answer for the debt or default of another, the law merely requires

that it, or some note or memorandum thereof, be in writing.

Otherwise, it would be unenforceable unless ratified. 32While the

acknowledgement of a surety before a notary public is required to

make the same apublic document, under Article 1358 of the Civil

Code, a contract of guaranty does not have to appear in a public

document.

And now to the other ground relied upon by the petitioner as basis

for the solidary liability of Chi, namely the criminal proceedings

against the latter for the violation of P.D. No. 115. Petitioner claims

that because of the said criminal proceedings, Chi would be

answerable for the civil liability arising therefrom pursuant to

Section 13 of P.D. No. 115. Public respondent rejected this claim

because such civil liability presupposes prior conviction as can be

gleaned from the phrase "without prejudice to the civil liability

arising from the criminal offense." Both are wrong. The said section

reads:

Sec. 13. Penalty Clause. The failure of an

entrustee to turn over the proceeds of the sale of

the goods, documents or instruments covered by a

trust receipt to the extent of the amount owing to

the entruster or as appears in the trust receipt or to

return said goods, documents or instruments if they

were not sold or disposed of in accordance with the

terms of the trust receipt shall constitute the crime

of estafa, punishable under the provisions of Article

Three hundred and fifteen, paragraph one (b) of Act

Numbered Three thousand eight hundred and

fifteen, as amended, otherwise known as theRevised Penal Code. If the violation or offense is

committed by a corporation, partnership,

association or other juridical entities, the penalty

provided for in this Decree shall be imposed upon

the directors, officers, employees or other officials

or persons therein responsible for the offense,

without prejudice to the civil liabilities arising from

the criminal offense.

A close examination of the quoted provision reveals that it is thelast sentence which provides for the correct solution. It is clear that

if the violation or offense is committed by a corporation,

partnership, association or other juridical entities, the penalty shall

be imposed upon the directors, officers, employees or other officials

or persons therein responsible for the offense. The penalty referred

to is imprisonment, the duration of which would depend on the

amount of the fraud as provided for in Article 315 of the Revised

Penal Code. The reason for this is obvious: corporations,


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partnerships, associations and other juridical entities cannot be put

in jail. However, it is these entities which are made liable for the

civil liability arising from the criminal offense. This is the import of

the clause "without prejudice to the civil liabilities arising from the

criminal offense." And, as We stated earlier, since that violation of a

trust receipt constitutes fraud under Article 33 of the Civil Code,

petitioner was acting well within its rights in filing an independent

civil action to enforce the civil liability arising therefrom against

Philippine Rayon.

The remaining issue to be resolved concerns the propriety of the

dismissal of the case against private respondent Chi. The trial court

based the dismissal, and the respondent Court its affirmance

thereof, on the theory that Chi is not liable on the trust receipt in

any capacity either as surety or as guarantor because his

signature at the dorsal portion thereof was useless; and even if hecould be bound by such signature as a simple guarantor, he cannot,

pursuant to Article 2058 of the Civil Code, be compelled to pay until

after petitioner has exhausted and resorted to all legal remedies

against the principal debtor, Philippine Rayon. The records fail to

show that petitioner had done so33

Reliance is thus placed on

Article 2058 of the Civil Code which provides:

Art. 2056. The guarantor cannot be compelled to

pay the creditor unless the latter has exhausted all

the property of the debtor, and has resorted to allthe legal remedies against the debtor.

Simply stated, there is as yet no cause of action against Chi.

We are not persuaded. Excussion is not a condition sine qua nonfor

the institution of an action against a guarantor. In Southern Motors,

Inc.vs.Barbosa, 34this Court stated:

4. Although an ordinary personal guarantor not a

mortgagor or pledgor may demand the

aforementioned exhaustion, the creditor may, prior

thereto, secure a judgment against said guarantor,

who shall be entitled, however, to a deferment of

the execution of said judgment against him until

after the properties of the principal debtor shall

have been exhausted to satisfy the obligation

involved in the case.

There was then nothing procedurally objectionable in impleading

private respondent Chi as a co-defendant in Civil Case No. Q-19312

before the trial court. As a matter of fact, Section 6, Rule 3 of the

Rules of Court on permissive joinder of parties explicitly allows it. It

reads:

Sec. 6. Permissive joinder of parties. All persons

in whom or against whom any right to relief in

respect to or arising out of the same transaction or

series of transactions is alleged to exist, whether

jointly, severally, or in the alternative, may, except

as otherwise provided in these rules, join as

plaintiffs or be joined as defendants in one

complaint, where any question of law or fact

common to all such plaintiffs or to all such

defendants may arise in the action; but the courtmay make such orders as may be just to prevent

any plaintiff or defendant from being embarrassed

or put to expense in connection with any

proceedings in which he may have no interest.

This is the equity rule relating to multifariousness. It is based on trial

convenience and is designed to permit the joinder of plaintiffs or


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defendants whenever there is a common question of law or fact. It

will save the parties unnecessary work, trouble and expense. 35

However, Chi's liability is limited to the principal obligation in the

trust receipt plus all the accessories thereof including judicial costs;

with respect to the latter, he shall only be liable for those costs

incurred after being judicially required to pay.36

Interest and

damages, being accessories of the principal obligation, should also

be paid; these, however, shall run only from the date of the filing of

the complaint. Attorney's fees may even be allowed in appropriate

cases.37

In the instant case, the attorney's fees to be paid by Chi cannot be

the same as that to be paid by Philippine Rayon since it is only the

trust receipt that is covered by the guaranty and not the full extent

of the latter's liability. All things considered, he can be held liable forthe sum of P10,000.00 as attorney's fees in favor of the petitioner.

Thus, the trial court committed grave abuse of discretion in

dismissing the complaint as against private respondent Chi and

condemning petitioner to pay him P20,000.00 as attorney's fees.

In the light of the foregoing, it would no longer necessary to discuss

the other issues raised by the petitioner

WHEREFORE, the instant Petition is hereby GRANTED.

The appealed Decision of 10 March 1986 of the public

respondent in AC-G.R. CV No. 66733 and, necessarily, that

of Branch 9 (Quezon City) of the then Court of First Instance

of Rizal in Civil Case No. Q-19312 are hereby REVERSED and

SET ASIDE and another is hereby entered:

1. Declaring private respondent

Philippine Rayon Mills, Inc. liable on

the twelve drafts in question

(Exhibits "X", "X-1" to "X-11",

inclusive) and on the trust receipt

(Exhibit "C"), and ordering it to pay

petitioner: (a) the amounts due

thereon in the total sum of

P956,384.95 as of 15 September

1974, with interest thereon at six

percent (6%) per annum from 16

September 1974 until it is fully paid,

less whatever may have been

applied thereto by virtue of

foreclosure of mortgages, if any; (b)

a sum equal to ten percent (10%) ofthe aforesaid amount as attorney's

fees; and (c) the costs.

2. Declaring private respondent

Anacleto R. Chi secondarily liable on

the trust receipt and ordering him

to pay the face value thereof, with

interest at the legal rate,

commencing from the date of the

filing of the complaint in Civil CaseNo. Q-19312 until the same is fully

paid as well as the costs and

attorney's fees in the sum of

P10,000.00 if the writ of execution

for the enforcement of the above

awards against Philippine Rayon

Mills, Inc. is returned unsatisfied.


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Costs against private respondents.

SO ORDERED.

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

G.R. No. 105395 December 10, 1993

BANK OF AMERICA, NT & SA, petitioners,

vs.

COURT OF APPEALS, INTER-RESIN INDUSTRIAL CORPORATION,

FRANCISCO TRAJANO, JOHN DOE AND JANE DOE, respondents.

Agcaoili & Associates for petitioner.

Valenzuela Law Center, Victor Fernandez and Ramon Guevarra for

private respondents.

VITUG,J.:

A "fiasco," involving an irrevocable letter of credit, has found the

distressed parties coming to court as adversaries in seeking a

definition of their respective rights or liabilities thereunder.

On 05 March 1981, petitioner Bank of America, NT & SA, Manila,

received by registered mail an Irrevocable Letter of Credit No.

20272/81 purportedly issued by Bank of Ayudhya, Samyaek Branch,

for the account of General Chemicals, Ltd., of Thailand in the

amount of US$2,782,000.00 to cover the sale of plastic ropes and

"agricultural files," with the petitioner as advising bank and private

respondent Inter-Resin Industrial Corporation as beneficiary.

On 11 March 1981, Bank of America wrote Inter-Resin informing the

latter of the foregoing and transmitting, along with the bank's

communication,

the latter of credit. Upon receipt of the letter-advice with the letter

of credit, Inter-Resin sent Atty. Emiliano Tanay to Bank of America

to have the letter of credit confirmed. The bank did not. Reynaldo

Dueas, bank employee in charge of letters of credit, however,

explained to Atty. Tanay that there was no need for confirmation

because the letter of credit would not have been transmitted if it

were not genuine.

Between 26 March to 10 April 1981, Inter-Resin sought to make a

partial availment under the letter of credit by submitting to Bank of

America invoices, covering the shipment of 24,000 bales of

polyethylene rope to General Chemicals valued at US$1,320,600.00,

the corresponding packing list, export declaration and bill of lading.Finally, after being satisfied that Inter-Resin's documents conformed

with the conditions expressed in the letter of credit, Bank of

America issued in favor of Inter-Resin a Cashier's Check for

P10,219,093.20, "the Peso equivalent of the draft (for)

US$1,320,600.00 drawn by Inter-Resin, after deducting the costs for

documentary stamps, postage and mail issuance." 1The check was

picked up by Inter-Resin's Executive Vice-President Barcelina Tio. On

10 April 1981, Bank of America wrote Bank of Ayudhya advising the

latter of the availment under the letter of credit and sought the

corresponding reimbursement therefor.

Meanwhile, Inter-Resin, through Ms. Tio, presented to Bank of

America the documents for the second availment under the same

letter of credit consisting of a packing list, bill of lading, invoices,

export declaration and bills in set, evidencing the second shipment

of goods. Immediately upon receipt of a telex from the Bank of

Ayudhya declaring the letter of credit fraudulent, 2Bank of America

stopped the processing of Inter-Resin's documents and sent a telex


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15

to its branch office in Bangkok, Thailand, requesting assistance in

determining the authenticity of the letter of credit. 3Bank of

America kept Inter-Resin informed of the developments. Sensing a

fraud, Bank of America sought the assistance of the National Bureau

of Investigation (NBI). With the help of the staff of the Philippine

Embassy at Bangkok, as well as the police and customs personnel of

Thailand, the NBI agents, who were sent to Thailand, discovered

that the vans exported by Inter-Resin did not contain ropes but

plastic strips, wrappers, rags and waste materials. Here at home,

the NBI also investigated Inter-Resin's President Francisco Trajano

and Executive Vice President Barcelina Tio, who, thereafter, were

criminally charged for estafa through falsification of commercial

documents. The case, however, was eventually dismissed by the

Rizal Provincial Fiscal who found noprima facieevidence to warrant

prosecution.

Bank of America sued Inter-Resin for the recovery of

P10,219,093.20, the peso equivalent of the draft for

US$1,320,600.00 on the partial availment of the now disowned

letter of credit. On the other hand, Inter-Resin claimed that not only

was it entitled to retain P10,219,093.20 on its first shipment but

also to the balance US$1,461,400.00 covering the second shipment.

On 28 June 1989, the trial court ruled for Inter-Resin,4holding that:

(a) Bank of America made assurances that enticed Inter-Resin to

send the merchandise to Thailand; (b) the telex declaring the letterof credit fraudulent was unverified and self-serving, hence, hearsay,

but even assuming that the letter of credit was fake, "the fault

should be borne by the BA which was careless and negligent"5for

failing to utilize its modern means of communication to verify with

Bank of Ayudhya in Thailand the authenticity of the letter of credit

before sending the same to Inter-Resin; (c) the loading of plastic

products into the vans were under strict supervision, inspection and

verification of government officers who have in their favor the

presumption of regularity in the performance of official functions;

and (d) Bank of America failed to prove the participation of Inter-

Resin or its employees in the alleged fraud as, in fact, the complaint

for estafa through falsification of documents was dismissed by the

Provincial Fiscal of Rizal.6

On appeal, the Court of Appeals7sustained the trial court; hence,

this present recourse by petitioner Bank of America.

The following issues are raised by Bank of America: (a) whether it

has warranted the genuineness and authenticity of the letter of

credit and, corollarily, whether it has acted merely as an advising

bank or as a confirming bank; (b) whether Inter-Resin has actually

shipped the ropes specified by the letter of credit; and (c) following

the dishonor of the letter of credit by Bank of Ayudhya, whether

Bank of America may recover against Inter-Resin under the draftexecuted in its partial availment of the letter of credit.

8

In rebuttal, Inter-Resin holds that: (a) Bank of America cannot, on

appeal, belatedly raise the issue of being only an advising bank; (b)

the findings of the trial court that the ropes have actually been

shipped is binding on the Court; and, (c) Bank of America cannot

recover from Inter-Resin because the drawer of the letter of credit

is the Bank of Ayudhya and not Inter-Resin.

If only to understand how the parties, in the first place, gotthemselves into the mess, it may be well to start by recalling how, in

its modern use, a letter of credit is employed in trade transactions.

A letter of credit is a financial device developed by merchants as a

convenient and relatively safe mode of dealing with sales of goods

to satisfy the seemingly irreconcilable interests of a seller, who

refuses to part with his goods before he is paid, and a buyer, who

wants to have control of the goods before paying. 9To break the


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16

impasse, the buyer may be required to contract a bank to issue a

letter of credit in favor of the seller so that, by virtue of the latter of

credit, the issuing bank can authorize the seller to draw drafts and

engage to pay them upon their presentment simultaneously with

the tender of documents required by the letter of credit.10

The

buyer and the seller agree on what documents are to be presented

for payment, but ordinarily they are documents of title evidencing

or attesting to the shipment of the goods to the buyer.

Once the credit is established, the seller ships the goods to the

buyer and in the process secures the required shipping documents

or documents of title. To get paid, the seller executes a draft and

presents it together with the required documents to the issuing

bank. The issuing bank redeems the draft and pays cash to the seller

if it finds that the documents submitted by the seller conform with

what the letter of credit requires. The bank then obtains possessionof the documents upon paying the seller. The transaction is

completed when the buyer reimburses the issuing bank and

acquires the documents entitling him to the goods. Under this

arrangement, the seller gets paid only if he delivers the documents

of title over the goods, while the buyer acquires said documents

and control over the goods only after reimbursing the bank.

What characterizes letters of credit, as distinguished from other

accessory contracts, is the engagement of the issuing bank to pay

the seller of the draft and the required shipping documents arepresented to it. In turn, this arrangement assures the seller of

prompt payment, independent of any breach of the main sales

contract. By this so-called "independence principle," the bank

determines compliance with the letter of credit only by examining

the shipping documents presented; it is precluded from determining

whether the main contract is actually accomplished or not.11

There would at least be three (3) parties: (a) the buyer,12

who

procures the letter of credit and obliges himself to reimburse the

issuing bank upon receipts of the documents of title; (b) the bank

issuingthe letter of credit, 13which undertakes to pay the seller

upon receipt of the draft and proper document of titles and to

surrender the documents to the buyer upon reimbursement; and,

(c) the seller, 14who in compliance with the contract of sale ships

the goods to the buyer and delivers the documents of title and draft

to the issuing bank to recover payment.

The number of the parties, not infrequently and almost invariably in

international trade practice, may be increased. Thus, the services of

an advising(notifying) bank15

may be utilized to convey to the seller

the existence of the credit; or, of a confirmingbank16

which will

lend credence to the letter of credit issued by a lesser known issuing

bank; or, of apaying bank,17

which undertakes to encash the draftsdrawn by the exporter. Further, instead of going to the place of the

issuing bank to claim payment, the buyer may approach another

bank, termed the negotiating bank,18

to have the draft discounted.

Being a product of international commerce, the impact of this

commercial instrument transcends national boundaries, and it is

thus not uncommon to find a dearth of national law that can

adequately provide for its governance. This country is no exception.

Our own Code of Commerce basically introduces only its concept

under Articles 567-572, inclusive, thereof. It is no wonder then whygreat reliance has been placed on commercial usage and practice,

which, in any case, can be justified by the universal acceptance of

the autonomy of contract rules. The rules were later developed into

what is now known as the Uniform Customs and Practice for

Documentary Credits ("U.C.P.") issued by the International Chamber

of Commerce. It is by no means a complete text by itself, for, to be

sure, there are other principles, which, although part of lex

mercatoria, are not dealt with the U.C.P.


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17

In FEATI Bank and Trust Company v.Court of Appeals,19

we have

accepted, to the extent of their pertinency, the application in our

jurisdiction of this international commercial credit regulatory set of

rules. 20In Bank of Phil.Islands v.De Nery, 21we have said that the

observances of the U.C.P. is justified by Article 2 of the Code of

Commerce which expresses that, in the absence of any particular

provision in the Code of Commerce, commercial transactions shall

be governed by usages and customs generally observed. We have

further observed that there being no specific provisions which

govern the legal complexities arising from transactions involving

letters of credit not only between or among banks themselves but

also between banks and the seller or the buyer, as the case may be,

the applicability of the U.C.P. is undeniable.

The first issue raised with the petitioner, i.e., that it has in this

instance merely been advising bank, is outrightly rejected by Inter-Resin and is thus sought to be discarded for having been raised only

on appeal. We cannot agree. The crucial point of dispute in this case

is whether under the "letter of credit," Bank of America has

incurred any liability to the "beneficiary" thereof, an issue that

largely is dependent on the bank's participation in that transaction;

as a mere advising or notifying bank, it would not be liable, but as a

confirming bank, had this been the case, i t could be considered as

having incurred that liability.22

In Insular Life Assurance Co.Ltd.Employees Association Natuvs.Insular Life Assurance Co., Ltd.,23

the Court said: Where the

issues already raised also rest on other issues not specifically

presented, as long as the latter issues bear relevance and close

relation to the former and as long as they arise from the matters on

record, the court has the authority to include them in its discussion

of the controversy and to pass upon them just as well. In brief, in

those cases where questions not particularly raised by the parties

surface as necessary for the complete adjudication of the rights and

obligations of the parties, the interests of justice dictate that the

court should consider and resolve them. The rule that only issues or

theories raised in the initial proceedings may be taken up by a party

thereto on appeal should only refer to independent, not

concomitant matters, to support or oppose the cause of action or

defense. The evil that is sought to be avoided, i.e., surprise to the

adverse party, is in reality not existent on matters that are properly

litigated in the lower court and appear on record.

It cannot seriously be disputed, looking at this case, that Bank of

America has, in fact, only been an advising, not confirming, bank,

and this much is clearly evident, among other things, by the

provisions of the letter of credit itself, the petitioner bank's letter of

advice, its request for payment of advising fee, and the admission of

Inter-Resin that it has paid the same. That Bank of America has

asked Inter-Resin to submit documents required by the letter ofcredit and eventually has paid the proceeds thereof, did not

obviously make it a confirming bank. The fact, too, that the draft

required by the letter of credit is to be drawn under the account of

General Chemicals (buyer) only means the same had to be

presented to Bank of Ayudhya (issuing bank) for payment. It may be

significant to recall that the letter of credit is an engagement of the

issuing bank, not the advising bank, to pay the draft.

No less important is that Bank of America's letter of 11 March 1981

has expressly stated that "[t]he enclosure issolely an adviseof creditopened by the abovementioned correspondent and conveys no

engagement by us." 24This written reservation by Bank of America in

limiting its obligation only to being an advising bank is in

consonance with the provisions of U.C.P.

As an advising or notifying bank, Bank of America did not incur any

obligation more than just notifying Inter-Resin of the letter of credit

issued in its favor, let alone to confirm the letter of credit. 25The


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18

bare statement of the bank employees, aforementioned, in

responding to the inquiry made by Atty. Tanay, Inter-Resin's

representative, on the authenticity of the letter of credit certainly

did not have the effect of novating the letter of credit and Bank of

America's letter of advise,26

nor can it justify the conclusion that the

bank must now assume total liability on the letter of credit. Indeed,

Inter-Resin itself cannot claim to have been all that free from fault.

As the seller, the issuance of the letter of credit should have

obviously been a great concern to it. 27It would have, in fact, been

strange if it did not, prior to the letter of credit, enter into a

contract, or negotiated at the every least, with General

Chemicals.28

In the ordinary course of business, the perfection of

contract precedes the issuance of a letter of credit.

Bringing the letter of credit to the attention of the seller is the

primordial obligation of an advising bank. The view that Bank ofAmerica should have first checked the authenticity of the letter of

credit with bank of Ayudhya, by using advanced mode of business

communications, before dispatching the same to Inter-Resin finds

no real support in U.C.P. Article 18 of the U.C.P. states that: "Banks

assume no liability or responsibility for the consequences arising out

of the delay and/or loss in transit of any messages, letters or

documents, or for delay, mutilation or other errors arising in the

transmission of any telecommunication . . ." As advising bank, Bank

of America is bound only to check the "apparent authenticity" of the

letter of credit, which it did.

29

Clarifying its meaning, Webster'sNinth New Collegiate Dictionary 30explains that the word

"APPARENT suggests appearance to unaided senses that is not or

may not be borne out by more rigorous examination or greater

knowledge."

May Bank of America then recover what it has paid under the letter

of credit when the corresponding draft for partial availment

thereunder and the required documents were later negotiated with

it by Inter-Resin? The answer is yes. This kind of transaction is what

is commonly referred to as a discounting arrangement. This time,

Bank of America has acted independently as a negotiating bank,

thus saving Inter-Resin from the hardship of presenting the

documents directly to Bank of Ayudhya to recover payment. (Inter-

Resin, of course, could have chosen other banks with which to

negotiate the draft and the documents.) As a negotiating bank, Bank

of America has a right to recourse against the issuer bank and until

reimbursement is obtained, Inter-Resin, as the drawer of the draft,

continues to assume a contingent liability thereon.31

While bank of America has indeed failed to allege material facts in

its complaint that might have likewise warranted the application of

the Negotiable Instruments Law and possible then allowed it to

even go after the indorsers of the draft, this failure, 32/

nonetheless, does not preclude petitioner bank's right (asnegotiating bank) of recovery from Inter-Resin itself. Inter-Resin

admits having received P10,219,093.20 from bank of America on

the letter of credit and in having executed the corresponding draft.

The payment to Inter-Resin has given, as aforesaid, Bank of America

the right of reimbursement from the issuing bank, Bank of Ayudhya

which, in turn, would then seek indemnification from the buyer (the

General Chemicals of Thailand). Since Bank of Ayudhya disowned

the letter of credit, however, Bank of America may now turn to

Inter-Resin for restitution.

Between the seller and the negotiating bank there

is the usual relationship existing between a drawer

and purchaser of drafts. Unless drafts drawn in

pursuance of the credit are indicated to be without

recourse therefore, the negotiating bank has the

ordinary right of recourse against the seller in the

event of dishonor by the issuing bank . . . The fact

that the correspondent and the negotiating bank


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19

may be one and the same does not affect its rights

and obligations in either capacity, although a special

agreement is always a possibility . . .33

The additional ground raised by the petitioner, i.e., that Inter-Resin

sent waste instead of its products, is real ly of no consequence. In

the operation of a letter of credit, the involved banks deal only with

documents and not on goods described in those documents. 34

The other issues raised in then instant petition, for instance,

whether or not Bank of Ayudhya did issue the letter of credit and

whether or not the main contract of sale that has given rise to the

letter of credit has been breached, are not relevant to this

controversy. They are matters, instead, that can only be of concern

to the herein parties in an appropriate recourse against those, who,

unfortunately, are not impleaded in these proceedings.

In fine, we hold that

First, given the factual findings of the courts below, we conclude

that petitioner Bank of America has acted merely as a notifying

bankand did not assume the responsibility of a confirming bank;

and

Second, petitioner bank, as a negotiating bank, is entitled to recover

on Inter-Resin's partial availment as beneficiary of the letter ofcredit which has been disowned by the alleged issuer bank.

No judgment of civil liability against the other defendants, Francisco

Trajano and other unidentified parties, can be made, in this

instance, there being no sufficient evidence to warrant any such

finding.

WHEREFORE, the assailed decision is SET ASIDE, and respondent

Inter-Resin Industrial Corporation is ordered to refund to petitioner

Bank of America NT & SA the amount of P10,219,093.20 with legal

interest from the filing of the complaint until fully paid.

No costs.

SO ORDERED.

Feliciano, Bidin, Romero and Melo, JJ., concur.

.R. NO. 117913. February 1, 2002]

CHARLES LEE, CHUA SIOK SUY, MARIANO SIO, ALFONSO YAP,

RICHARD VELASCO and ALFONSO CO,petitioners, vs.

COURT OF APPEALS and PHILIPPINE BANK OF

COMMUNICATIONS, respondents.

[G.R. NO. 117914. February 1, 2002]

MICO METALS CORPORATION,petitioner, vs. COURT OF APPEALS

and PHILIPPINE BANK OF

COMMUNICATIONS, respondents.

D E C I S I O N

DE LEON, JR.,J:


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Before us is the joint and consolidated petition for review of

the Decision[1]dated June 15, 1994 of the Court of Appeals in CA-

G.R. CV No. 27480 entitled, Philippine Bank of Communications

vs. Mico Metals Corporation, Charles Lee, Chua Siok Suy,

Mariano Sio, Alfonso Yap, Richard Velasco and Alfonso Co, which

reversed the decision of the Regional Trial Court (RTC) of Manila,Branch 55 dismissing the complaint for a sum of money filed by

private respondent Philippine Bank of Communications against

herein petitioners, Mico Metals Corporation (MICO, for brevity),

Charles Lee, Chua Siok Suy,[2]

Mariano Sio, Alfonso Yap, Richard

Velasco and Alfonso Co.[3]The dispositive portion of the said

Decision of the Court of Appeals, reads:

WHEREFORE, the decision of the Regional Trial Court is hereby

reversed and in lieu thereof, a new one is entered:

a) Ordering the defendants-appellees jointly and severally

to pay plaintiff PBCom the sum of Five million four

hundred fifty-one thousand six hundred sixty-three

pesos and ninety centavos (P5,451,663.90)

representing defendants-appellees unpaid obligations

arising from ordinary loans granted by the plaintiff plus

legal interest until fully paid.

b) Ordering defendants-appellees jointly and severally to

pay PBCom the sum of Four hundred sixty-one

thousand six hundred pesos and sixty-six centavos (P461,600.66) representing defendants-appellees unpaid

obligations arising from their letters of credit and trust

receipt transactions with plaintiff PBCom plus legal

interest until fully paid.

c) Ordering defendants-appellees jointly and severally to

pay PBCom the sum of P50,000.00 as attorneys fees.

No pronouncement as to costs.

The facts of the case are as follows:

On March 2, 1979, Charles Lee, as President of MICO wrote

private respondent Philippine Bank of Communications (PBCom)

requesting for a grant of a discounting loan/credit line in the sum of

Three Million Pesos (P3,000,000.00) for the purpose of carrying

out MICOsline of business as well as to maintain its volume of

business.

On the same day, Charles Lee requested for another

discounting loan/credit line of Three Million Pesos (P3,000,000.00)

from PBCom for the purpose of opening letters of credit and trust

receipts.

In connection with the requests for discounting loan/creditlines, PBCom was furnished by MICO the following resolution which

was adopted unanimously by MICOsBoard of Directors:

RESOLVED, that the President, Mr. Charles Lee, and the Vice-

President and General Manager, Mr. Mariano A. Sio, singly or

jointly, be and they are duly authorized and empowered for and in

behalf of this Corporation to apply for, negotiate and secure the

approval of commercial loans and other banking facilities and

accommodations, such as, but not limited to discount loans, letters

of credit, trust receipts, lines for marginal deposits on foreign anddomestic letters of credit, negotiate out-of-town checks, etc. from

the Philippine Bank of Communications, 216 Juan Luna, Manila in

such sums as they shall deem advantageous, the principal of all of

which shall not exceed the total amount of TEN MILLION PESOS

(P10,000,000.00), Philippine Currency, plus any interests that may

be agreed upon with said Bank in such loans and other credit lines of

the same kind and such further terms and conditions as may, upon

granting of said loans and other banking facilities, be imposed by
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the Bank; and to make, execute, sign and deliver any contracts of

mortgage, pledge or sale of one, some or all of the properties of the

Company, or any other agreements or documents of whatever

nature or kind, including the signing, indorsing, cashing, negotiation

and execution of promissory notes, checks, money orders or other

negotiable instruments, which may be necessary and proper inconnection with said loans and other banking facilities, or with their

amendments, renewals and extensions of payment of the whole or

any part thereof.[4]

On March 26, 1979, MICO availed of the f irst loan of One

Million Pesos (P1,000,000.00) from PBCom. Upon maturity of the

loan, MICO caused the same to be renewed, the last renewal of

which was made on May 21, 1982 under Promissory Note BNA No.

26218.[5]

Another loan of One Million Pesos (P1,000,000.00) was availed

of by MICO from PBCom which was likewise later on renewed, the

last renewal of which was made on May 21, 1982 under Promissory

Note BNA No. 26219.[6]

To complete MICOsavailment of Three

Million Pesos (P3,000,000.00) discounting loan/credit line

with PBCom, MICO availed of another loan from PBComin the sum

of One Million Pesos (P1,000,000.00) on May 24, 1979. As in

previous loans, this was rolled over or renewed, the last renewal of

which was made on May 25, 1982 under Promissory Note BNA No.

26253.[7]

As security for the loans, MICO through its Vice-President and

General Manager, Mariano Sio, executed on May 16, 1979 a Deed

of Real Estate Mortgage over its properties situated inPasig, Metro

Manila covered by Transfer Certificates of Title (TCT) Nos. 11248

and 11250.

On March 26, 1979 Charles Lee, Chua Siok Suy, Mariano Sio,

Alfonso Yap and Richard Velasco, in their personal capacities

executed a Surety Agreement[8]

in favor of PBCom whereby the

petitioners jointly and severally, guaranteed the prompt payment

on due dates or at maturity of overdrafts, promissory notes,

discounts, drafts, letters of credit, bills of exchange, trust receipts,

and other obligations of every kind and nature, for which MICO may

be held accountable by PBCom. It was provided, however, that the

liability of the sureties shall not at any one time exceed the principalamount of Three Million Pesos (P3,000,000.00) plus interest, costs,

losses, charges and expenses including attorneys fees incurred

by PBCom in connection therewith.

On July 14, 1980, petitioner Charles Lee, in his capacity as

president of MICO, wrote PBCom and applied for an additional loan

in the sum of Four Million Pesos (P4,000,000.00). The loan was

intended for the expansion and modernization of the companys

machineries. Upon approval of the said application for loan, MICO

availed of the additional loan of Four Million Pesos (P4,000,000.00)

as evidenced by Promissory Note TA No. 094 .[9]

As per agreement, the proceeds of all the loan availments were

credited to MICOscurrent checking account with PBCom. To induce

the PBCom to increase the credit line of MICO, Charles Lee,

Chua Siok Suy, Mariano Sio, Alfonso Yap, Richard Velasco and

Alfonso Co (hereinafter referred to as petitioners-sureties),

executed another surety agreement[10]

in favor of PBCom on July 28,

1980, whereby they jointly and severally guaranteed the prompt

payment on due dates or at maturity of overdrafts, promissory

notes, discounts, drafts, letters of credit, bills of exchange, trustreceipts and all other obligations of any kind and nature for which

MICO may be held accountable by PBCom. It was provided,

however, that their liability shall not at any one time exceed the

sum of Seven Million Five Hundred Thousand Pesos (P7,500,000.00)

including interest, costs, charges, expenses and attorneys fees

incurred by MICO in connection therewith.

On July 29, 1980, MICO furnished PBCom with a notarized

certification issued by its corporate secretary, Atty. P.B. Barrera,
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that Chua Siok Suy was duly authorized by the Board of Directors to

negotiate on behalf of MICO for loans and other

credit availments from PBCom. Indicated in the certification was the

following resolution unanimously approved by the Board

of Directors:

RESOLVED, AS IT IS HEREBY RESOLVED, That Mr. Chua Siok Suy be,

as he is hereby authorized and empowered, on behalf of MICO

METALS CORPORATION from time to time, to borrow money and

obtain other credit facilities, with or without security, from the

PHILIPPINE BANK OF COMMUNICATIONS in such amount(s) and

under such terms and conditions as he may determine, with full

power and authority to execute, sign and deliver such contracts,

instruments and papers in connection therewith, including real

estate and chattel mortgages, pledges and assignments over the

properties of the Corporation; and to renew and/or extend and/orroll-over and/or reavail of the credit facilities granted thereunder,

either for lesser or for greater amount(s), the intention being that

such credit facilities and all securities of whatever kind given as

collaterals therefor shall be a continuing security.

RESOLVED FURTHER, That said bank is hereby authorized,

empowered and directed to rely on the authority given hereunder,

the same to continue in full force and effect until written notice of its

revocation shall be received by said Bank.[11]

On July 2, 1981, MICO filed with PBCom an application for a

domestic letter of credit in the sum of Three Hundred Forty-Eight

Thousand Pesos (P348,000.00).[12]

The corresponding irrevocable

letter of credit was approved and opened under LC No. L-

16060.[13]

Thereafter, the domestic letter of credit was negotiated

and accepted by MICO as evidenced by the corresponding bank

draft issued for the purpose.[14]

After the supplier of the

merchandise was paid, a trust receipt

upon MICOsown initiative, was executed in favor of PBCom.[15]

On September 14, 1981, MICO applied for another domestic

letter of credit with PBCom in the sum of Two Hundred Ninety

Thousand Pesos (P290,000.00).[16]

The corresponding irrevocableletter of credit was issued on September 22, 1981 under LC No. L-

16334.[17]After the beneficiary of the said letter of credit was paid

by PBCom for the price of the merchandise, the goods were

delivered to MICO which executed a corresponding trust

receipt[18]

in favor of PBCom.

On November 10, 1981, MICO applied for authority to open a

foreign letter of credit in favor of Ta Jih Enterprises Co., Ltd.,[19]and

thus, the corresponding letter of credit[20]

was then issued

byPBCom with a cable sent to the beneficiary, Ta Jih Enterprises Co.,

Ltd. advising that said beneficiary may draw funds from the accountof PBCom in its correspondent banks New York

Office.[21]PBCom also informed its corresponding bank in Taiwan,

the Irving Trust Company, of the approved letter of credit. The

correspondent bank acknowledged PBComsadvice through a

confirmation letter[22]

and by debiting from PBComsaccount with

the said correspondent bank the sum of Eleven Thousand Nine

Hundred Sixty US Dollars ($11 ,960.00).[23]

As in past transactions,

MICO executed in favor of PBCom a corresponding trust receipt .[24]

On January 4, 1982, MICO applied, for authority to open a

foreign letter of credit in the sum of One Thousand Nine HundredUS Dollars ($1,900.00), with PBCom.[25]Upon approval, the

corresponding letter of credit denominated as LC No. 62293[26]

was

issued whereupon PBCom advised its correspondent bank and

MICO[27]of the same. Negotiation and proper acceptance of the

letter of credit were then made by MICO. Again, a corresponding

trust receipt[28]was executed by MICO in favor of PBCom.
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In all the transactions involving foreign letters of

credit, PBCom turned over to MICO the necessary documents such

as the bills of lading and commercial invoices to enable the latter to

withdraw the goods from the port of Manila.

On May 21, 1982 MICO obtained from PBCom another loan inthe sum of Three Hundred Seventy-Seven Thousand Pesos

(P377,000.00) covered by Promissory Note BA No. 7458.[29]

Upon maturity of all credit availments obtained by MICO

from PBCom, the latter made a demand for payment.[30]For failure

of petitioner MICO to pay the obligations incurred despite repeated

demands, private

respondent PBCom extrajudicially foreclosed MICOsreal estate

mortgage and sold the said mortgaged properties in a public auction

sale held on November 23, 1982. Private respondent PBCom which

emerged as the highest bidder in the auction sale, applied theproceeds of the purchase price at public auction of Three Million

Pesos (P3,000,000.00) to the expenses of the foreclosure, interest

and charges and part of the principal of the loans, leaving an unpaid

balance of Five Million Four Hundred Forty-One Thousand Six

Hundred Sixty-Three Pesos and Ninety Centavos (P5,441,663.90)

exclusive of penalty and interest charges. Aside from the unpaid

balance of Five Million Four Hundred Forty-One Thousand Six

Hundred Sixty-Three Pesos and Ninety Centavos (P5,441,663.90),

MICO likewise had another standing obligation in the sum of Four

Hundred Sixty-One Thousand Six Hundred Pesos and Six Centavos(P461,600.06) representing its trust receipts liabilities to private

respondent. PBCom then demanded the settlement of the

aforesaid obligations from herein petitioners-sureties who,

however, refused to acknowledge their obligations to PBCom under

the surety agreements. Hence, PBCom filed a complaint with prayer

for writ of preliminary attachment before the Regional Trial Court of

Manila, which was raffled to Branch 55, alleging that MICO was no

longer in operation and had no properties to answer for its

obligations. PBCom further alleged that petitioner Charles Lee has

disposed or concealed his properties with intent to defraud his

creditors. Except for MICO and Charles Lee, the sheriff of the RTC

failed to serve the summons on herein petitioners-sureties since

they were all reportedly abroad at the time. An alias summons was

later issued but the sheriff was not able to serve the same topetitioners Alfonso Co and Chua Siok Suy who was already sickly at

the time and reportedly in Taiwan where he later died.

Petitioners (MICO and herein petitioners-sureties) denied all

the allegations of the complaint filed by respondent PBCom, and

alleged that: a) MICO was not granted the alleged loans and neither

did it receive the proceeds of the aforesaid loans; b)

Chua Siok Suy was never granted any valid Board Resolution to sign

for and in behalf of MICO; c) PBCom acted in bad faith in granting

the alleged loans and in releasing the proceeds thereof; d)

petitioners were never advised of the alleged grant of loans and the

subsequent releases therefor, if any; e) since no loan was ever

released to or received by MICO, the corresponding real estate

mortgage and the surety agreements signed concededly by the

petitioners-sureties are null and void.

The trial court gave credence to the testimonies of herein

petitioners and dismissed the complaint filed by PBCom. The trial

court likewise declared the real estate mortgage and its foreclosure

null and void. In ruling for herein petitioners, the trial court said

that PBCom failed to adequately prove that the proceeds of theloans were ever delivered to MICO. The trial court pointed out,

among others, that while PBCom claimed that the proceeds of the

Four Million Pesos (P4,000,000.00) loan covered by promissory note

TA 094 were deposited to the current account of petitioner

MICO, PBCom failed to produce the ledger account showing such

deposit. The trial court added that while PBCom may have loaned to

MICO the other sums of Three Hundred Forty-Eight Thousand Pesos

(P348,000.00) and Two Hundred Ninety Thousand Pesos
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(P290,000.00), no proof has been adduced as to the existence of the

goods covered and paid by the said amounts. Hence, inasmuch as

no consideration ever passed from PBCom to MICO, all the

documents involved therein, such as the promissory notes, real

estate mortgage including the surety agreements were all void or

nonexistent for lack of cause or consideration. The trial court saidthat the lack of proof as regards the existence of the merchandise

covered by the letters of credit bolstered the claim of herein

petitioners that no purchases of the goods were really made and

that the letters of credit transactions were simply resorted to by

the PBCom and Chua SiokSuy to accommodate the latter in his

financial requirements.

The Court of Appeals reversed the ruling of the trial court,

saying that the latter committed an erroneous application and

appreciation of the rules governing the burden of proof. Citing

Section 24 of the Negotiable Instruments Law which provides that

Every negotiable instrument is deemedprima facie to have been

issued for valuable consideration and every person whose

signature appears thereon to have become a party thereto for

value, the Court of Appeals said that while the subject promissory

notes and letters of credit issued by the PBCom made no mention of

delivery of cash, it is presumed that said negotiable instruments

were issued for valuable consideration. The Court of Appeals also

cited the case of Gatmaitan vs. Court of Appeals[31]

which holds that

"there is a presumption that an instrument sets out the true

agreement of the parties thereto and that it was executed forvaluable consideration. Theappellate court noted and found that

a notarized Certification was issued by MICOscorporate secretary,

P.B. Barrera, that Chua Siok Suy, was duly authorized by the Board

of Directors of MICO to borrow money and obtain credit facilities

from PBCom.

Petitioners filed a motion for reconsideration of the challenged

decision of the Court of Appeals but this was denied in a Resolution

dated November 7, 1994 issued by its Former Second Division.

Petitioners-sureties then filed a petition for review on certiorari

with this Court, docketed as G.R. No. 117913, assailing the decision

of the Court of Appeals. MICO likewise filed a separate petition for

review on certiorari, docketed as G.R. No. 117914, with this Court

assailing the same decision rendered by the Court of Appeals. Uponmotion filed by petitioners, the two (2) petitions were consolidated

on January 11, 1995.[32]

Petitioners contend that there was no proof that the proceeds

of the loans or the goods under the trust receipts were ever

delivered to and received by MICO. But the record shows otherwise.

Petitioners-sureties further contend that assuming that there was

delivery by PBCom of the proceeds of the loans and the goods, the

contracts were executed by an unauthorized person, more

specifically Chua Siok Suy who acted fraudulently and in collusion

with PBCom to defraud MICO.

The pertinent issues raised in the consolidated cases at bar are:

a) whether or not the proceeds of the loans and letters of credit

transactions were ever delivered to MICO, and b) whether or not

the individual petitioners, as sureties, may be held liable under the

two (2) Surety Agreements executed on March 26, 1979 and July 28,

1980.

In civil cases, the party having the burden of proof must

establish his case by preponderance of evidence.[33]

Preponderance

of evidence means evidence which is more convincing to the courtas worthy of belief than that which is offered in opposition thereto.

Petitioners contend that the al leged promissory notes, trust receipts

and surety agreements attached to the complaint filed

by PBCom did not ripen into valid and binding contracts inasmuch

as there is no evidence of the delivery of money or loan proceeds to

MICO or to any of the petitioners-sureties. Petitioners claim that

under normal banking practice, borrowers are required to

accomplish promissory notes in blank even before the grant of the
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