CommRev Cases (1)

COMMREV - NEGO A. INTRODUCTION 5 CASES

G.R. No. 184458 January 14, 2015

RODRIGO RIVERA, Petitioner, vs. SPOUSES SALVADOR CHUA AND VIOLETA S. CHUA, Respondents..

PEREZ, J.:

Before us are consolidated Petitions for Review on Certiorari under Rule 45 of the Rules of Court assailing the Decision1 of the Court of Appeals in CA-G.R. SP No. 90609 which affirmed with modification the separate rulings of the Manila City trial courts, the Regional Trial Court, Branch 17 in Civil Case No. 02-1052562 and the Metropolitan Trial Court (MeTC), Branch 30, in Civil Case No. 163661,3 a case for collection of a sum of money due a promissory note. While all three (3) lower courts upheld the validity and authenticity of the promissory note as duly signed by the obligor, Rodrigo Rivera (Rivera), petitioner in G.R. No. 184458, the appellate court modified the trial courts’ consistent awards: (1) the stipulated interest rate of sixty percent (60%) reduced to twelve percent (12%) per annumcomputed from the date of judicial or extrajudicial demand, and (2) reinstatement of the award of attorney’s fees also in a reduced amount of P50,000.00.

In G.R. No. 184458, Rivera persists in his contention that there was no valid promissory note and questions the entire ruling of the lower courts. On the other hand, petitioners in G.R. No. 184472, Spouses Salvador and Violeta Chua (Spouses Chua), take exception to the appellate court’s reduction of the stipulated interest rate of sixty percent (60%) to twelve percent (12%) per annum.

We proceed to the facts.

The parties were friends of long standing having known each other since 1973: Rivera and Salvador are kumpadres, the former is the godfather of the Spouses Chua’s son.

On 24 February 1995, Rivera obtained a loan from the Spouses Chua:

PROMISSORY NOTE

120,000.00

FOR VALUE RECEIVED, I, RODRIGO RIVERA promise to pay spouses SALVADOR C. CHUA and VIOLETA SY CHUA, the sum of One Hundred Twenty Thousand Philippine Currency (P120,000.00) on December 31, 1995.

It is agreed and understood that failure on my part to pay the amount of (120,000.00) One Hundred Twenty Thousand Pesos on December 31, 1995. (sic) I agree to pay the sum equivalent to FIVE PERCENT (5%) interest monthly from the date of default until the entire obligation is fully paid for.

Should this note be referred to a lawyer for collection, I agree to pay the further sum equivalent to twenty percent (20%) of the total amount due and payable as and for attorney’s fees which in no case shall be less than P5,000.00 and to pay in addition the cost of suit and other incidental litigation expense.

Any action which may arise in connection with this note shall be brought in the proper Court of the City of Manila.

Manila, February 24, 1995[.]

(SGD.) RODRIGO RIVERA4

In October 1998, almost three years from the date of payment stipulated in the promissory note, Rivera, as partial payment for the loan, issued and delivered to the SpousesChua, as payee, a check numbered 012467, dated 30 December 1998, drawn against Rivera’s current account with the Philippine Commercial International Bank (PCIB) in the amount of P25,000.00.

On 21 December 1998, the Spouses Chua received another check presumably issued by Rivera, likewise drawn against Rivera’s PCIB current account, numbered 013224, duly signed and dated, but blank as to payee and amount. Ostensibly, as per understanding by the parties, PCIB Check No. 013224 was issued in the amount ofP133,454.00 with "cash" as payee. Purportedly, both checks were simply partial payment for Rivera’s loan in the principal amount of P120,000.00.

Upon presentment for payment, the two checks were dishonored for the reason "account closed."

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As of 31 May 1999, the amount due the Spouses Chua was pegged at P366,000.00 covering the principal ofP120,000.00 plus five percent (5%) interest per month from 1 January 1996 to 31 May 1999.

The Spouses Chua alleged that they have repeatedly demanded payment from Rivera to no avail. Because of Rivera’s unjustified refusal to pay, the Spouses Chua were constrained to file a suit on 11 June 1999. The case was raffled before the MeTC, Branch 30, Manila and docketed as Civil Case No. 163661.

In his Answer with Compulsory Counterclaim, Rivera countered that: (1) he never executed the subject Promissory Note; (2) in all instances when he obtained a loan from the Spouses Chua, the loans were always covered by a security; (3) at the time of the filing of the complaint, he still had an existing indebtedness to the Spouses Chua, secured by a real estate mortgage, but not yet in default; (4) PCIB Check No. 132224 signed by him which he delivered to the Spouses Chua on 21 December 1998, should have been issued in the amount of only 1,300.00, representing the amount he received from the Spouses Chua’s saleslady; (5) contrary to the supposed agreement, the Spouses Chua presented the check for payment in the amount of P133,454.00; and (6) there was no demand for payment of the amount of P120,000.00 prior to the encashment of PCIB Check No. 0132224.5

In the main, Rivera claimed forgery of the subject Promissory Note and denied his indebtedness thereunder.

The MeTC summarized the testimonies of both parties’ respective witnesses:

[The spouses Chua’s] evidence include[s] documentary evidence and oral evidence (consisting of the testimonies of [the spouses] Chua and NBI Senior Documents Examiner Antonio Magbojos). x x x

Witness Magbojos enumerated his credentials as follows: joined the NBI (1987); NBI document examiner (1989); NBI Senior Document Examiner (1994 to the date he testified); registered criminologist; graduate of 18th Basic Training Course [i]n Questioned Document Examination conducted by the NBI; twice attended a seminar on US Dollar Counterfeit Detection conducted by the US Embassy in Manila; attended a seminar on Effective Methodology in Teaching and Instructional design conducted by the NBI Academy; seminar lecturer on Questioned Documents, Signature Verification and/or Detection; had examined more than a hundred thousand questioned documents at the time he testified.

Upon [order of the MeTC], Mr. Magbojos examined the purported signature of [Rivera] appearing in the Promissory Note and compared the signature thereon with the specimen signatures of [Rivera] appearing on several documents. After a thorough study, examination, and comparison of the signature on the questioned document (Promissory Note) and the specimen signatures on the documents submitted to him, he concluded that the questioned signature appearing in the Promissory Note and the specimen signatures of [Rivera] appearing on the other documents submitted were written by one and the same person. In connection with his findings, Magbojos prepared Questioned Documents Report No. 712-1000 dated 8 January 2001, with the following conclusion: "The questioned and the standard specimen signatures RODGRIGO RIVERA were written by one and the same person."

[Rivera] testified as follows: he and [respondent] Salvador are "kumpadres;" in May 1998, he obtained a loan from [respondent] Salvador and executed a real estate mortgage over a parcel of land in favor of [respondent Salvador] as collateral; aside from this loan, in October, 1998 he borrowed P25,000.00 from Salvador and issued PCIB Check No. 126407 dated 30 December 1998; he expressly denied execution of the Promissory Note dated 24 February 1995 and alleged that the signature appearing thereon was not his signature; [respondent Salvador’s] claim that PCIB Check No. 0132224 was partial payment for the Promissory Note was not true, the truth being that he delivered the check to [respondent Salvador] with the space for amount left blank as he and [respondent] Salvador had agreed that the latter was to fill it in with the amount of P1,300.00 which amount he owed [the spouses Chua]; however, on 29 December 1998 [respondent] Salvador called him and told him that he had written P133,454.00 instead of P1,300.00; x x x. To rebut the testimony of NBI Senior Document Examiner Magbojos, [Rivera] reiterated his averment that the signature appearing on the Promissory Note was not his signature and that he did not execute the Promissory Note.6

After trial, the MeTC ruled in favor of the Spouses Chua:

WHEREFORE, [Rivera] is required to pay [the spouses Chua]: P120,000.00 plus stipulated interest at the rate of 5% per month from 1 January 1996, and legal interest at the rate of 12% percent per annum from 11 June 1999, as actual and compensatory damages; 20% of the whole amount due as attorney’s fees.7

On appeal, the Regional Trial Court, Branch 17, Manila affirmed the Decision of the MeTC, but deleted the award of attorney’s fees to the Spouses Chua:

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WHEREFORE, except as to the amount of attorney’s fees which is hereby deleted, the rest of the Decision dated October 21, 2002 is hereby AFFIRMED.8

Both trial courts found the Promissory Note as authentic and validly bore the signature of Rivera. Undaunted, Rivera appealed to the Court of Appeals which affirmed Rivera’s liability under the Promissory Note, reduced the imposition of interest on the loan from 60% to 12% per annum, and reinstated the award of attorney’s fees in favor of the Spouses Chua:

WHEREFORE, the judgment appealed from is hereby AFFIRMED, subject to the MODIFICATION that the interest rate of 60% per annum is hereby reduced to12% per annum and the award of attorney’s fees is reinstated atthe reduced amount of P50,000.00 Costs against [Rivera].9

Hence, these consolidated petitions for review on certiorariof Rivera in G.R. No. 184458 and the Spouses Chua in G.R. No. 184472, respectively raising the following issues:

A. In G.R. No. 184458

1. WHETHER OR NOT THE HONORABLE COURT OF APPEALS ERRED IN UPHOLDING THE RULING OF THE RTC AND M[e]TC THAT THERE WAS A VALID PROMISSORY NOTE EXECUTED BY [RIVERA].

2. WHETHER OR NOT THE HONORABLE COURT OF APPEALS ERRED IN HOLDING THAT DEMAND IS NO LONGER NECESSARY AND IN APPLYING THE PROVISIONS OF THE NEGOTIABLE INSTRUMENTS LAW.

3. WHETHER OR NOT THE HONORABLE COURT OF APPEALS ERRED IN AWARDING ATTORNEY’S FEES DESPITE THE FACT THAT THE SAME HAS NO BASIS IN FACT AND IN LAW AND DESPITE THE FACT THAT [THE SPOUSES CHUA] DID NOT APPEAL FROM THE DECISION OF THE RTC DELETING THE AWARD OF ATTORNEY’S FEES.10

B. In G.R. No. 184472

[WHETHER OR NOT] THE HONORABLE COURT OF APPEALS COMMITTED GROSS LEGAL ERROR WHEN IT MODIFIED THE APPEALED JUDGMENT BY REDUCING THE INTEREST RATE FROM 60% PER ANNUM TO 12% PER ANNUM IN SPITE OF THE FACT THAT RIVERA NEVER RAISED IN HIS ANSWER THE DEFENSE THAT THE SAID

STIPULATED RATE OF INTEREST IS EXORBITANT, UNCONSCIONABLE, UNREASONABLE, INEQUITABLE, ILLEGAL, IMMORAL OR VOID.11

As early as 15 December 2008, wealready disposed of G.R. No. 184472 and denied the petition, via a Minute Resolution, for failure to sufficiently show any reversible error in the ruling of the appellate court specifically concerning the correct rate of interest on Rivera’s indebtedness under the Promissory Note.12

On 26 February 2009, Entry of Judgment was made in G.R. No. 184472.

Thus, what remains for our disposition is G.R. No. 184458, the appeal of Rivera questioning the entire ruling of the Court of Appeals in CA-G.R. SP No. 90609.

Rivera continues to deny that heexecuted the Promissory Note; he claims that given his friendship withthe Spouses Chua who were money lenders, he has been able to maintain a loan account with them. However, each of these loan transactions was respectively "secured by checks or sufficient collateral."

Rivera points out that the Spouses Chua "never demanded payment for the loan nor interest thereof (sic) from [Rivera] for almost four (4) years from the time of the alleged default in payment [i.e., after December 31, 1995]."13

On the issue of the supposed forgery of the promissory note, we are not inclined to depart from the lower courts’ uniform rulings that Rivera indeed signed it.

Rivera offers no evidence for his asseveration that his signature on the promissory note was forged, only that the signature is not his and varies from his usual signature. He likewise makes a confusing defense of having previously obtained loans from the Spouses Chua who were money lenders and who had allowed him a period of "almost four (4) years" before demanding payment of the loan under the Promissory Note.

First, we cannot give credence to such a naked claim of forgery over the testimony of the National Bureau of Investigation (NBI) handwriting expert on the integrity of the promissory note. On that score, the appellate court aptly disabled Rivera’s contention:

[Rivera] failed to adduce clear and convincing evidence that the signature on the promissory note is a forgery. The fact of forgery cannot be presumed but must be

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proved by clear, positive and convincing evidence. Mere variance of signatures cannot be considered as conclusive proof that the same was forged. Save for the denial of Rivera that the signature on the note was not his, there is nothing in the records to support his claim of forgery. And while it is true that resort to experts is not mandatory or indispensable to the examination of alleged forged documents, the opinions of handwriting experts are nevertheless helpful in the court’s determination of a document’s authenticity.

To be sure, a bare denial will not suffice to overcome the positive value of the promissory note and the testimony of the NBI witness. In fact, even a perfunctory comparison of the signatures offered in evidence would lead to the conclusion that the signatures were made by one and the same person.

It is a basic rule in civil cases that the party having the burden of proof must establish his case by preponderance of evidence, which simply means "evidence which is of greater weight, or more convincing than that which is offered in opposition to it."

Evaluating the evidence on record, we are convinced that [the Spouses Chua] have established a prima faciecase in their favor, hence, the burden of evidence has shifted to [Rivera] to prove his allegation of forgery. Unfortunately for [Rivera], he failed to substantiate his defense.14 Well-entrenched in jurisprudence is the rule that factual findings of the trial court, especially when affirmed by the appellate court, are accorded the highest degree of respect and are considered conclusive between the parties.15 A review of such findings by this Court is not warranted except upon a showing of highly meritorious circumstances, such as: (1) when the findings of a trial court are grounded entirely on speculation, surmises or conjectures; (2) when a lower court's inference from its factual findings is manifestly mistaken, absurd or impossible; (3) when there is grave abuse of discretion in the appreciation of facts; (4) when the findings of the appellate court go beyond the issues of the case, or fail to notice certain relevant facts which, if properly considered, will justify a different conclusion; (5) when there is a misappreciation of facts; (6) when the findings of fact are conclusions without mention of the specific evidence on which they are based, are premised on the absence of evidence, or are contradicted by evidence on record.16 None of these exceptions obtains in this instance. There is no reason to depart from the separate factual findings of the three (3) lower courts on the validity of Rivera’s signature reflected in the Promissory Note.

Indeed, Rivera had the burden ofproving the material allegations which he sets up in his Answer to the plaintiff’s claim or cause of action, upon which issue is joined, whether they relate to the whole case or only to certain issues in the case.17

In this case, Rivera’s bare assertion is unsubstantiated and directly disputed by the testimony of a handwriting expert from the NBI. While it is true that resort to experts is not mandatory or indispensable to the examination or the comparison of handwriting, the trial courts in this case, on its own, using the handwriting expert testimony only as an aid, found the disputed document valid.18

Hence, the MeTC ruled that:

[Rivera] executed the Promissory Note after consideration of the following: categorical statement of [respondent] Salvador that [Rivera] signed the Promissory Note before him, in his ([Rivera’s]) house; the conclusion of NBI Senior Documents Examiner that the questioned signature (appearing on the Promissory Note) and standard specimen signatures "Rodrigo Rivera" "were written by one and the same person"; actual view at the hearing of the enlarged photographs of the questioned signature and the standard specimen signatures.19

Specifically, Rivera insists that: "[i]f that promissory note indeed exists, it is beyond logic for a money lender to extend another loan on May 4, 1998 secured by a real estate mortgage, when he was already in default and has not been paying any interest for a loan incurred in February 1995."20

We disagree.

It is likewise likely that precisely because of the long standing friendship of the parties as "kumpadres," Rivera was allowed another loan, albeit this time secured by a real estate mortgage, which will cover Rivera’s loan should Rivera fail to pay. There is nothing inconsistent with the Spouses Chua’s two (2) and successive loan accommodations to Rivera: one, secured by a real estate mortgage and the other, secured by only a Promissory Note.

Also completely plausible is thatgiven the relationship between the parties, Rivera was allowed a substantial amount of time before the Spouses Chua demanded payment of the obligation due under the Promissory Note.

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In all, Rivera’s evidence or lack thereof consisted only of a barefaced claim of forgery and a discordant defense to assail the authenticity and validity of the Promissory Note. Although the burden of proof rested on the Spouses Chua having instituted the civil case and after they established a prima facie case against Rivera, the burden of evidence shifted to the latter to establish his defense.21 Consequently, Rivera failed to discharge the burden of evidence, refute the existence of the Promissory Note duly signed by him and subsequently, that he did not fail to pay his obligation thereunder. On the whole, there was no question left on where the respective evidence of the parties preponderated—in favor of plaintiffs, the Spouses Chua. Rivera next argues that even assuming the validity of the Promissory Note, demand was still necessary in order to charge him liable thereunder. Rivera argues that it was grave error on the part of the appellate court to apply Section 70 of the Negotiable Instruments Law (NIL).22

We agree that the subject promissory note is not a negotiable instrument and the provisions of the NIL do not apply to this case. Section 1 of the NIL requires the concurrence of the following elements to be a negotiable instrument:

(a) It must be in writing and signed by the maker or drawer;(b) Must contain an unconditional promise or order to pay a sum certain in money;(c) Must be payable on demand, or at a fixed or determinable future time;(d) Must be payable to order or to bearer; and(e) Where the instrument is addressed to a drawee, he must be named or

otherwise indicated therein with reasonable certainty.

On the other hand, Section 184 of the NIL defines what negotiable promissory note is: SECTION 184. Promissory Note, Defined. – A negotiable promissory note within the meaning of this Act is an unconditional promise in writing made by one person to another, signed by the maker, engaging to pay on demand, or at a fixed or determinable future time, a sum certain in money to order or to bearer. Where a note is drawn to the maker’s own order, it is not complete until indorsed by him.

The Promissory Note in this case is made out to specific persons, herein respondents, the Spouses Chua, and not to order or to bearer, or to the order of the Spouses Chua as payees. However, even if Rivera’s Promissory Note is not a negotiable instrument and therefore outside the coverage of Section 70 of the NIL which provides that presentment for payment is not necessary to charge the person liable on the instrument, Rivera is still liable under the terms of the Promissory Note that he issued.

The Promissory Note is unequivocal about the date when the obligation falls due and becomes demandable—31 December 1995. As of 1 January 1996, Rivera had already incurred in delay when he failed to pay the amount ofP120,000.00 due to the Spouses Chua on 31 December 1995 under the Promissory Note.

Article 1169 of the Civil Code explicitly provides:

Art. 1169. Those obliged to deliver or to do something incur in delay from the time the obligee judicially or extrajudicially demands from them the fulfillment of their obligation.

However, the demand by the creditor shall not be necessary in order that delay may exist:

(1) When the obligation or the law expressly so declare; or(2) When from the nature and the circumstances of the obligation it appears that

the designation of the time when the thing is to be delivered or the service is to be rendered was a controlling motive for the establishment of the contract; or

(3) When demand would be useless, as when the obligor has rendered it beyond his power to perform.

In reciprocal obligations, neither party incurs in delay if the other does not comply or is not ready to comply in a proper manner with what is incumbent upon him. From the moment one of the parties fulfills his obligation, delay by the other begins. (Emphasis supplied)

There are four instances when demand is not necessary to constitute the debtor in default: (1) when there is an express stipulation to that effect; (2) where the law so provides; (3) when the period is the controlling motive or the principal inducement for the creation of the obligation; and (4) where demand would be useless. In the first two paragraphs, it is not sufficient that the law or obligation fixes a date for performance; it must further state expressly that after the period lapses, default will commence.

We refer to the clause in the Promissory Note containing the stipulation of interest:

It is agreed and understood that failure on my part to pay the amount of (P120,000.00) One Hundred Twenty Thousand Pesos on December 31, 1995. (sic) I

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agree to pay the sum equivalent to FIVE PERCENT (5%) interest monthly from the date of default until the entire obligation is fully paid for.23

which expressly requires the debtor (Rivera) to pay a 5% monthly interest from the "date of default" until the entire obligation is fully paid for. The parties evidently agreed that the maturity of the obligation at a date certain, 31 December 1995, will give rise to the obligation to pay interest. The Promissory Note expressly provided that after 31 December 1995, default commences and the stipulation on payment of interest starts.

The date of default under the Promissory Note is 1 January 1996, the day following 31 December 1995, the due date of the obligation. On that date, Rivera became liable for the stipulated interest which the Promissory Note says is equivalent to 5% a month. In sum, until 31 December 1995, demand was not necessary before Rivera could be held liable for the principal amount of P120,000.00. Thereafter, on 1 January 1996, upon default, Rivera became liable to pay the Spouses Chua damages, in the form of stipulated interest.

The liability for damages of those who default, including those who are guilty of delay, in the performance of their obligations is laid down on Article 117024 of the Civil Code.

Corollary thereto, Article 2209 solidifies the consequence of payment of interest as an indemnity for damages when the obligor incurs in delay:

Art. 2209. If the obligation consists inthe payment of a sum of money, and the debtor incurs in delay, the indemnity for damages, there being no stipulation to the contrary, shall be the payment of the interest agreed upon, and in the absence of stipulation, the legal interest, which is six percent per annum. (Emphasis supplied)

Article 2209 is specifically applicable in this instance where: (1) the obligation is for a sum of money; (2) the debtor, Rivera, incurred in delay when he failed to pay on or before 31 December 1995; and (3) the Promissory Note provides for an indemnity for damages upon default of Rivera which is the payment of a 5%monthly interest from the date of default.

We do not consider the stipulation on payment of interest in this case as a penal clause although Rivera, as obligor, assumed to pay additional 5% monthly interest on the principal amount of P120,000.00 upon default.

Article 1226 of the Civil Code provides:

Art. 1226. In obligations with a penal clause, the penalty shall substitute the indemnity for damages and the payment of interests in case of noncompliance, if there isno stipulation to the contrary. Nevertheless, damages shall be paid if the obligor refuses to pay the penalty or is guilty of fraud in the fulfillment of the obligation.

The penalty may be enforced only when it is demandable in accordance with the provisions of this Code.

The penal clause is generally undertaken to insure performance and works as either, or both, punishment and reparation. It is an exception to the general rules on recovery of losses and damages. As an exception to the general rule, a penal clause must be specifically set forth in the obligation.25

In high relief, the stipulation in the Promissory Note is designated as payment of interest, not as a penal clause, and is simply an indemnity for damages incurred by the Spouses Chua because Rivera defaulted in the payment of the amount of P120,000.00. The measure of damages for the Rivera’s delay is limited to the interest stipulated in the Promissory Note. In apt instances, in default of stipulation, the interest is that provided by law.26

In this instance, the parties stipulated that in case of default, Rivera will pay interest at the rate of 5% a month or 60% per annum. On this score, the appellate court ruled:

It bears emphasizing that the undertaking based on the note clearly states the date of payment tobe 31 December 1995. Given this circumstance, demand by the creditor isno longer necessary in order that delay may exist since the contract itself already expressly so declares. The mere failure of [Spouses Chua] to immediately demand or collect payment of the value of the note does not exonerate [Rivera] from his liability therefrom. Verily, the trial court committed no reversible error when it imposed interest from 1 January 1996 on the ratiocination that [Spouses Chua] were relieved from making demand under Article 1169 of the Civil Code.

As observed by [Rivera], the stipulated interest of 5% per month or 60% per annum in addition to legal interests and attorney’s fees is, indeed, highly iniquitous and unreasonable. Stipulated interest rates are illegal if they are unconscionable and the Court is allowed to temper interest rates when necessary. Since the interest rate

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agreed upon is void, the parties are considered to have no stipulation regarding the interest rate, thus, the rate of interest should be 12% per annum computed from the date of judicial or extrajudicial demand.27

The appellate court found the 5% a month or 60% per annum interest rate, on top of the legal interest and attorney’s fees, steep, tantamount to it being illegal, iniquitous and unconscionable. Significantly, the issue on payment of interest has been squarely disposed of in G.R. No. 184472 denying the petition of the Spouses Chua for failure to sufficiently showany reversible error in the ruling of the appellate court, specifically the reduction of the interest rate imposed on Rivera’s indebtedness under the Promissory Note. Ultimately, the denial of the petition in G.R. No. 184472 is res judicata in its concept of "bar by prior judgment" on whether the Court of Appeals correctly reduced the interest rate stipulated in the Promissory Note.

Res judicata applies in the concept of "bar by prior judgment" if the following requisites concur: (1) the former judgment or order must be final; (2) the judgment or order must be on the merits; (3) the decision must have been rendered by a court having jurisdiction over the subject matter and the parties; and (4) there must be, between the first and the second action, identity of parties, of subject matter and of causes of action.28

In this case, the petitions in G.R. Nos. 184458 and 184472 involve an identity of parties and subject matter raising specifically errors in the Decision of the Court of Appeals. Where the Court of Appeals’ disposition on the propriety of the reduction of the interest rate was raised by the Spouses Chua in G.R. No. 184472, our ruling thereon affirming the Court of Appeals is a "bar by prior judgment."

At the time interest accrued from 1 January 1996, the date of default under the Promissory Note, the then prevailing rate of legal interest was 12% per annum under Central Bank (CB) Circular No. 416 in cases involving the loan or for bearance of money.29 Thus, the legal interest accruing from the Promissory Note is 12% per annum from the date of default on 1 January 1996. However, the 12% per annumrate of legal interest is only applicable until 30 June 2013, before the advent and effectivity of Bangko Sentral ng Pilipinas (BSP) Circular No. 799, Series of 2013 reducing the rate of legal interest to 6% per annum. Pursuant to our ruling in Nacar v. Gallery Frames,30 BSP Circular No. 799 is prospectively applied from 1 July 2013. In short, the applicable rate of legal interest from 1 January 1996, the date when Rivera defaulted, to date when this Decision becomes final and executor is divided into two periods reflecting two rates of legal interest: (1) 12% per annum from 1

January 1996 to 30 June 2013; and (2) 6% per annum FROM 1 July 2013 to date when this Decision becomes final and executory.

As for the legal interest accruing from 11 June 1999, when judicial demand was made, to the date when this Decision becomes final and executory, such is likewise divided into two periods: (1) 12% per annum from 11 June 1999, the date of judicial demand to 30 June 2013; and (2) 6% per annum from 1 July 2013 to date when this Decision becomes final and executor.31 We base this imposition of interest on interest due earning legal interest on Article 2212 of the Civil Code which provides that "interest due shall earn legal interest from the time it is judicially demanded, although the obligation may be silent on this point."

From the time of judicial demand, 11 June 1999, the actual amount owed by Rivera to the Spouses Chua could already be determined with reasonable certainty given the wording of the Promissory Note.32

We cite our recent ruling in Nacar v. Gallery Frames:33

I. When an obligation, regardless of its source, i.e., law, contracts, quasicontracts, delicts or quasi-delicts is breached, the contravenor can be held liable for damages. The provisions under Title XVIII on "Damages" of the Civil Code govern in determining the measure of recoverable damages.

II. With regard particularly to an award of interest in the concept of actual and compensatory damages, the rate of interest, as well as the accrual thereof, is imposed, as follows:

1. When the obligation is breached, and it consists in the payment of a sum of money, i.e., a loan or for bearance of money, the interest due should be that which may have been stipulated in writing. Furthermore, the interest due shall itself earn legal interest from the time it is judicially demanded. In the absence of stipulation, the rate of interest shall be 6% per annum to be computed from default, i.e., from judicial or extra judicial demand under and subject to the provisions ofArticle 1169 of the Civil Code.

2. When an obligation, not constituting a loan or forbearance of money, is breached, an interest on the amount of damages awarded may be imposed at the discretion of the court at the rate of 6% per annum.1âwphi1 No interest, however, shall be adjudged on unliquidated claims or damages, except when or until the demand can be established with reasonable

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certainty. Accordingly, where the demand is established with reasonable certainty, the interest shall begin to run from the time the claim is made judicially or extrajudicially (Art. 1169, Civil Code), but when such certainty cannot be so reasonably established at the time the demand is made, the interest shall begin to run only from the date the judgment of the court is made (at which time the quantification of damages may be deemed to have been reasonably ascertained). The actual base for the computation of legal interest shall, in any case, be on the amount finally adjudged. 3. When the judgment of the court awarding a sum of money becomes final and executory, the rate of legal interest, whether the case falls under paragraph 1 or paragraph 2, above, shall be 6% per annum from such finality until its satisfaction, this interim period being deemed to be by then an equivalent to a for bearance of credit. And, in addition to the above, judgments that have become final and executory prior to July 1, 2013, shall not be disturbed and shall continue to be implemented applying the rate of interest fixed therein. (Emphasis supplied)

On the reinstatement of the award of attorney’s fees based on the stipulation in the Promissory Note, weagree with the reduction thereof but not the ratiocination of the appellate court that the attorney’s fees are in the nature of liquidated damages or penalty. The interest imposed in the Promissory Note already answers as liquidated damages for Rivera’s default in paying his obligation. We award attorney’s fees, albeit in a reduced amount, in recognition that the Spouses Chua were compelled to litigate and incurred expenses to protect their interests.34Thus, the award of P50,000.00 as attorney’s fees is proper.

For clarity and to obviate confusion, we chart the breakdown of the total amount owed by Rivera to the Spouses Chua:

Face value of the Promissory Note

Stipulated Interest A & B

Interest due earning legal interest A & B

Attorney’s fees

TotalAmount

February 24, 1995 toDecember 31, 1995

A. January 1, 1996 toJune 30, 2013

B. July 1 2013 to date when this Decision becomes final and executory

A. June 11, 1999 (date of judicial demand) to June 30, 2013B. July 1, 2013 to date when this Decision becomes final and executory

Wholesale Amount

P120,000.00 A. 12 % per annumon the principal amount ofP120,000.00B. 6% per annumon the principal amount ofP120,000.00

A. 12% per annumon the total amount of column 2B. 6% per annumon the total amount of column 235

P50,000.00 Total amount of Columns 1-4

The total amount owing to the Spouses Chua set forth in this Decision shall further earn legal interest at the rate of 6% per annum computed from its finality until full payment thereof, the interim period being deemed to be a forbearance of credit.

WHEREFORE, the petition in G.R. No. 184458 is DENIED. The Decision of the Court of Appeals in CA-G.R. SP No. 90609 is MODIFIED. Petitioner Rodrigo Rivera is ordered to pay respondents Spouse Salvador and Violeta Chua the following:

(1) the principal amount of P120,000.00;

(2) legal interest of 12% per annumof the principal amount of P120,000.00 reckoned from 1 January 1996 until 30 June 2013;

(3) legal interest of 6% per annumof the principal amount of P120,000.00 form 1 July 2013 to date when this Decision becomes final and executory;

(4) 12% per annumapplied to the total of paragraphs 2 and 3 from 11 June 1999, date of judicial demand, to 30 June 2013, as interest due earning legal interest;

(5) 6% per annumapplied to the total amount of paragraphs 2 and 3 from 1 July 2013 to date when this Decision becomes final and executor, asinterest due earning legal interest;

(6) Attorney’s fees in the amount of P50,000.00; and

(7) 6% per annum interest on the total of the monetary awards from the finality of this Decision until full payment thereof.

Costs against petitioner Rodrigo Rivera.

8


SO ORDERED

G.R. No. 166018 June 4, 2014

THE HONGKONG AND SHANGHAI BANKING CORPORATION LIMITED-PHILIPPINE BRANCHES, Petitioner, vs. COMMISSIONER OF INTERNAL REVENUE, Respondent;

LEONARDO-DE CASTRO, J.:

These petitions for review on certiorari1 assail the Decision2 and Resolution dated July 8, 2004 and October 25, 2004, respectively, of the Court of Appeals in CA-G.R. SP No. 77580, as well as the Decision3 and Resolution dated September 2, 2004 and April 4, 2005, respectively, of the Court of Appeals in CA-G.R. SP No. 70814. The respective Decisions in the said cases similarly reversed and set aside the decisions of the Court of Tax Appeals (CTA) in CTA Case Nos. 59514 and 6009,5 respectively, and dismissed the petitions of petitioner Hongkong and Shanghai Banking Corporation Limited-Philippine Branches (HSBC). The corresponding Resolutions, on the other hand, denied the respective motions for reconsideration of the said Decisions.

HSBC performs, among others, custodial services on behalf of its investor-clients, corporate and individual, resident or non-resident of the Philippines, with respect to their passive investments in the Philippines, particularly investments in shares of stocks in domestic corporations. As a custodian bank, HSBC serves as the collection/payment agent with respect to dividends and other income derived from its investor-clients’ passive investments.6

HSBC’s investor-clients maintain Philippine peso and/or foreign currency accounts, which are managed by HSBC through instructions given through electronic messages. The said instructions are standard forms known in the banking industry as SWIFT, or "Society for Worldwide Interbank Financial Telecommunication." In purchasing shares of stock and other investment in securities, the investor-clients would send electronic messages from abroad instructing HSBC to debit their local or foreign currency accounts and to pay the purchase price therefor upon receipt of the securities.7

Pursuant to the electronic messages of its investor-clients, HSBC purchased and paid Documentary Stamp Tax (DST) from September to December 1997 and also from January to December 1998 amounting to P19,572,992.10 and P32,904,437.30, respectively, broken down as follows:

A. September to December 1997

September 1997 P 6,981,447.90

October 1997 6,209,316.60

November 1997 3,978,510.30

December 1997 2,403,717.30

Total P19,572,992.10

B. January to December 1998

January 1998 P 3,328,305.60

February 1998 4,566,924.90

March 1998 5,371,797.30

April 1998 4,197,235.50

May 1998 2,519,587.20

June 1998 2,301,333.00

July 1998 1,586,404.50

August 1998 1,787,359.50

September 1998 1,231,828.20

October 1998 1,303,184.40

November 1998 2,026,379.70

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December 1998 2,684,097.50

Total P32,904,437.30

On August 23, 1999, the Bureau of Internal Revenue (BIR), thru its then Commissioner, Beethoven Rualo, issued BIR Ruling No. 132-99 to the effect that instructions or advises from abroad on the management of funds located in the Philippines which do not involve transfer of funds from abroad are not subject to DST. BIR Ruling No. 132-99 reads:

Date: August 23, 1999

FERRY TOLEDO VICTORINO GONZAGA& ASSOCIATESG/F AFC Building, Alfaro St.Salcedo Village, MakatiMetro Manila

Attn: Atty. Tomas C. ToledoTax Counsel

Gentlemen:

This refers to your letter dated July 26, 1999 requesting on behalf of your clients, the CITIBANK & STANDARD CHARTERED BANK, for a ruling as to whether or not the electronic instructions involving the following transactions of residents and non-residents of the Philippines with respect to their local or foreign currency accounts are subject to documentary stamp tax under Section 181 of the 1997 Tax Code, viz:

A. Investment purchase transactions:

An overseas client sends instruction to its bank in the Philippines to either:

(i) debit its local or foreign currency account and to pay a named recipient in the Philippines; or

(ii) receive funds from another bank in the Philippines for deposit into its account and to pay a named recipient in the Philippines."

The foregoing transactions are carried out under instruction from abroad and [do] not involve actual fund transfer since the funds are already in the Philippine accounts. The instructions are in the form of electronic messages (i.e., SWIFT MT100 or MT 202 and/or MT 521). In both cases, the payment is against the delivery of investments purchased. The purchase of investments and the payment comprise one single transaction. DST has already been paid under Section 176 for the investment purchase.

B. Other transactions:

An overseas client sends an instruction to its bank in the Philippines to either:

(i) debit its local or foreign currency account and to pay a named recipient, who may be another bank, a corporate entity or an individual in the Philippines; or

(ii) receive funds from another bank in the Philippines for deposit to its account and to pay a named recipient, who may be another bank, a corporate entity or an individual in the Philippines."

The above instruction is in the form of an electronic message (i.e., SWIFT MT 100 or MT 202) or tested cable, and may not refer to any particular transaction.

The opening and maintenance by a non-resident of local or foreign currency accounts with a bank in the Philippines is permitted by the Bangko Sentral ng Pilipinas, subject to certain conditions.

In reply, please be informed that pursuant to Section 181 of the 1997 Tax Code, which provides that –

SEC. 181. Stamp Tax Upon Acceptance of Bills of Exchange and Others.– Upon any acceptance or payment of any bill of exchange or order for the payment of money purporting to be drawn in a foreign country but payable in the Philippines, there shall be collected a documentary stamp tax of Thirty centavos (P0.30) on each Two hundred pesos (P200), or fractional part thereof, of the face value of any such bill of exchange, or order, or Philippine equivalent of such value, if expressed in foreign currency. (Underscoring supplied.)

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a documentary stamp tax shall be imposed on any bill of exchange or order for payment purporting to be drawn in a foreign country but payable in the Philippines.

Under the foregoing provision, the documentary stamp tax shall be levied on the instrument, i.e., a bill of exchange or order for the payment of money, which purports to draw money from a foreign country but payable in the Philippines. In the instant case, however, while the payor is residing outside the Philippines, he maintains a local and foreign currency account in the Philippines from where he will draw the money intended to pay a named recipient. The instruction or order to pay shall be made through an electronic message, i.e., SWIFT MT 100 or MT 202 and/or MT 521. Consequently, there is no negotiable instrument to be made, signed or issued by the payee. In the meantime, such electronic instructions by the non-resident payor cannot be considered as a transaction per se considering that the same do not involve any transfer of funds from abroad or from the place where the instruction originates. Insofar as the local bank is concerned, such instruction could be considered only as a memorandum and shall be entered as such in its books of accounts. The actual debiting of the payor’s account, local or foreign currency account in the Philippines, is the actual transaction that should be properly entered as such.

Under the Documentary Stamp Tax Law, the mere withdrawal of money from a bank deposit, local or foreign currency account, is not subject to DST, unless the account so maintained is a current or checking account, in which case, the issuance of the check or bank drafts is subject to the documentary stamp tax imposed under Section 179 of the 1997 Tax Code. In the instant case, and subject to the physical impossibility on the part of the payor to be present and prepare and sign an instrument purporting to pay a certain obligation, the withdrawal and payment shall be made in cash. In this light, the withdrawal shall not be subject to documentary stamp tax. The case is parallel to an automatic bank transfer of local funds from a savings account to a checking account maintained by a depositor in one bank.

Likewise, the receipt of funds from another bank in the Philippines for deposit to the payee’s account and thereafter upon instruction of the non-resident depositor-payor, through an electronic message, the depository bank to debit his account and pay a named recipient shall not be subject to documentary stamp tax.

It should be noted that the receipt of funds from another local bank in the Philippines by a local depository bank for the account of its client residing abroad is part of its regular banking transaction which is not subject to documentary stamp

tax. Neither does the receipt of funds makes the recipient subject to the documentary stamp tax. The funds are deemed to be part of the deposits of the client once credited to his account, and which, thereafter can be disposed in the manner he wants. The payor-client’s further instruction to debit his account and pay a named recipient in the Philippines does not involve transfer of funds from abroad. Likewise, as stated earlier, such debit of local or foreign currency account in the Philippines is not subject to the documentary stamp tax under the aforementioned Section 181 of the Tax Code.

In the light of the foregoing, this Office hereby holds that the instruction made through an electronic message by non-resident payor-client to debit his local or foreign currency account maintained in the Philippines and to pay a certain named recipient also residing in the Philippines is not the transaction contemplated under Section 181 of the 1997 Tax Code. Such being the case, such electronic instruction purporting to draw funds from a local account intended to be paid to a named recipient in the Philippines is not subject to documentary stamp tax imposed under the foregoing Section.

This ruling is being issued on the basis of the foregoing facts as represented. However, if upon investigation it shall be disclosed that the facts are different, this ruling shall be considered null and void.

Very truly yours,

(Sgd.) BEETHOVEN L. RUALOCommissioner of Internal Revenue8

With the above BIR Ruling as its basis, HSBC filed on October 8, 1999 an administrative claim for the refund of the amount of P19,572,992.10 allegedly representing erroneously paid DST to the BIR for the period covering September to December 1997.

Subsequently, on January 31, 2000, HSBC filed another administrative claim for the refund of the amount ofP32,904,437.30 allegedly representing erroneously paid DST to the BIR for the period covering January to December 1998.

As its claims for refund were not acted upon by the BIR, HSBC subsequently brought the matter to the CTA as CTA Case Nos. 5951 and 6009, respectively, in order to suspend the running of the two-year prescriptive period.

11


The CTA Decisions dated May 2, 2002 in CTA Case No. 6009 and dated December 18, 2002 in CTA Case No. 5951 favored HSBC. Respondent Commissioner of Internal Revenue was ordered to refund or issue a tax credit certificate in favor of HSBC in the reduced amounts of P30,360,570.75 in CTA Case No. 6009 and P16,436,395.83 in CTA Case No. 5951, representing erroneously paid DST that have been sufficiently substantiated with documentary evidence. The CTA ruled that HSBC is entitled to a tax refund or tax credit because Sections 180 and 181 of the 1997 Tax Code do not apply to electronic message instructions transmitted by HSBC’s non-resident investor-clients:

The instruction made through an electronic message by a nonresident investor-client, which is to debit his local or foreign currency account in the Philippines and pay a certain named recipient also residing in the Philippines is not the transaction contemplated in Section 181 of the Code. In this case, the withdrawal and payment shall be made in cash. It is parallel to an automatic bank transfer of local funds from a savings account to a checking account maintained by a depositor in one bank. The act of debiting the account is not subject to the documentary stamp tax under Section 181. Neither is the transaction subject to the documentary stamp tax under Section 180 of the same Code. These electronic message instructions cannot be considered negotiable instruments as they lack the feature of negotiability, which, is the ability to be transferred (Words and Phrases).

These instructions are considered as mere memoranda and entered as such in the books of account of the local bank, and the actual debiting of the payor’s local or foreign currency account in the Philippines is the actual transaction that should be properly entered as such.9

The respective dispositive portions of the Decisions dated May 2, 2002 in CTA Case No. 6009 and dated December 18, 2002 in CTA Case No. 5951 read:

II. CTA Case No. 6009

WHEREFORE, in the light of all the foregoing, the instant Petition for Review is PARTIALLY GRANTED. Respondent is hereby ORDERED to REFUND or ISSUE A TAX CREDIT CERTIFICATE in favor of Petitioner the amount of P30,360,570.75 representing erroneous payment of documentary stamp tax for the taxable year 1998.10

II. CTA Case No. 5951

WHEREFORE, in the light of the foregoing, the instant petition is hereby partially granted. Accordingly, respondent is hereby ORDERED to REFUND, or in the alternative, ISSUE A TAX CREDIT CERTIFICATE in favor of the petitioner in the reduced amount of P16,436,395.83 representing erroneously paid documentary stamp tax for the months of September 1997 to December 1997.11

However, the Court of Appeals reversed both decisions of the CTA and ruled that the electronic messages of HSBC’s investor-clients are subject to DST. The Court of Appeals explained:

At bar, [HSBC] performs custodial services in behalf of its investor-clients as regards their passive investments in the Philippines mainly involving shares of stocks in domestic corporations. These investor-clients maintain Philippine peso and/or foreign currency accounts with [HSBC]. Should they desire to purchase shares of stock and other investments securities in the Philippines, the investor-clients send their instructions and advises via electronic messages from abroad to [HSBC] in the form of SWIFT MT 100, MT 202, or MT 521 directing the latter to debit their local or foreign currency account and to pay the purchase price upon receipt of the securities (CTA Decision, pp. 1-2; Rollo, pp. 41-42). Pursuant to Section 181 of the NIRC, [HSBC] was thus required to pay [DST] based on its acceptance of these electronic messages – which, as [HSBC] readily admits in its petition filed before the [CTA], were essentially orders to pay the purchases of securities made by its client-investors (Rollo, p. 60).

Appositely, the BIR correctly and legally assessed and collected the [DST] from [HSBC] considering that the said tax was levied against the acceptances and payments by [HSBC] of the subject electronic messages/orders for payment. The issue of whether such electronic messages may be equated as a written document and thus be subject to tax is beside the point. As We have already stressed, Section 181 of the law cited earlier imposes the [DST] not on the bill of exchange or order for payment of money but on the acceptance or payment of the said bill or order. The acceptance of a bill or order is the signification by the drawee of its assent to the order of the drawer to pay a given sum of money while payment implies not only the assent to the said order of the drawer and a recognition of the drawer’s obligation to pay such aforesaid sum, but also a compliance with such obligation (Philippine National Bank vs. Court of Appeals, 25 SCRA 693 [1968]; Prudential Bank vs. Intermediate Appellate Court, 216 SCRA 257 [1992]). What is vital to the valid imposition of the [DST] under Section 181 is the existence of the requirement of acceptance or payment by the drawee (in this case, [HSBC]) of the order for payment of money from its investor-clients and that the said order was drawn from

12


a foreign country and payable in the Philippines. These requisites are surely present here.

It would serve the parties well to understand the nature of the tax being imposed in the case at bar. In Philippine Home Assurance Corporation vs. Court of Appeals (301 SCRA 443 [1999]), the Supreme Court ruled that [DST is] levied on the exercise by persons of certain privileges conferred by law for the creation, revision, or termination of specific legal relationships through the execution of specific instruments, independently of the legal status of the transactions giving rise thereto. In the same case, the High Court also declared – citing Du Pont vs. United States (300 U.S. 150, 153 [1936])

The tax is not upon the business transacted but is an excise upon the privilege, opportunity, or facility offered at exchanges for the transaction of the business. It is an excise upon the facilities used in the transaction of the business separate and apart from the business itself. x x x.

To reiterate, the subject [DST] was levied on the acceptance and payment made by [HSBC] pursuant to the order made by its client-investors as embodied in the cited electronic messages, through which the herein parties’ privilege and opportunity to transact business respectively as drawee and drawers was exercised, separate and apart from the circumstances and conditions related to such acceptance and subsequent payment of the sum of money authorized by the concerned drawers. Stated another way, the [DST] was exacted on [HSBC’s] exercise of its privilege under its drawee-drawer relationship with its client-investor through the execution of a specific instrument which, in the case at bar, is the acceptance of the order for payment of money. The acceptance of a bill or order for payment may be done in writing by the drawee in the bill or order itself, or in a separate instrument (Prudential Bank vs. Intermediate Appellate Court, supra.)Here, [HSBC]’s acceptance of the orders for the payment of money was veritably ‘done in writing in a separate instrument’ each time it debited the local or foreign currency accounts of its client-investors pursuant to the latter’s instructions and advises sent by electronic messages to [HSBC]. The [DST] therefore must be paid upon the execution of the specified instruments or facilities covered by the tax – in this case, the acceptance by [HSBC] of the order for payment of money sent by the client-investors through electronic messages. x x x.12

Hence, these petitions.

HSBC asserts that the Court of Appeals committed grave error when it disregarded the factual and legal conclusions of the CTA. According to HSBC, in the absence of abuse or improvident exercise of authority, the CTA’s ruling should not have been disturbed as the CTA is a highly specialized court which performs judicial functions, particularly for the review of tax cases. HSBC further argues that the Commissioner of Internal Revenue had already settled the issue on the taxability of electronic messages involved in these cases in BIR Ruling No. 132-99 and reiterated in BIR Ruling No. DA-280-2004.13

The Commissioner of Internal Revenue, on the other hand, claims that Section 181 of the 1997 Tax Code imposes DST on the acceptance or payment of a bill of exchange or order for the payment of money. The DST under Section 18 of the 1997 Tax Code is levied on HSBC’s exercise of a privilege which is specifically taxed by law. BIR Ruling No. 132-99 is inconsistent with prevailing law and long standing administrative practice, respondent is not barred from questioning his own revenue ruling. Tax refunds like tax exemptions are strictly construed against the taxpayer.14

The Court finds for HSBC.

The Court agrees with the CTA that the DST under Section 181 of the Tax Code is levied on the acceptance or payment of "a bill of exchange purporting to be drawn in a foreign country but payable in the Philippines" and that "a bill of exchange is an unconditional order in writing addressed by one person to another, signed by the person giving it, requiring the person to whom it is addressed to pay on demand or at a fixed or determinable future time a sum certain in money to order or to bearer." A bill of exchange is one of two general forms of negotiable instruments under the Negotiable Instruments Law.15

The Court further agrees with the CTA that the electronic messages of HSBC’s investor-clients containing instructions to debit their respective local or foreign currency accounts in the Philippines and pay a certain named recipient also residing in the Philippines is not the transaction contemplated under Section 181 of the Tax Code as such instructions are "parallel to an automatic bank transfer of local funds from a savings account to a checking account maintained by a depositor in one bank." The Court favorably adopts the finding of the CTA that the electronic messages "cannot be considered negotiable instruments as they lack the feature of negotiability, which, is the ability to be transferred" and that the said electronic messages are "mere memoranda" of the transaction consisting of the "actual debiting of the [investor-client-payor’s] local or foreign currency account in the Philippines" and "entered as such in the books of account of the local bank," HSBC.16

13


More fundamentally, the instructions given through electronic messages that are subjected to DST in these cases are not negotiable instruments as they do not comply with the requisites of negotiability under Section 1 of the Negotiable Instruments Law, which provides:

Sec. 1. Form of negotiable instruments.– An instrument to be negotiable must conform to the following requirements:

(a) It must be in writing and signed by the maker or drawer;(b) Must contain an unconditional promise or order to pay a sum certain

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

time;(d) Must be payable to order or to bearer; and(e) Where the instrument is addressed to a drawee, he must be named or

otherwise indicated therein with reasonable certainty.

The electronic messages are not signed by the investor-clients as supposed drawers of a bill of exchange; they do not contain an unconditional order to pay a sum certain in money as the payment is supposed to come from a specific fund or account of the investor-clients; and, they are not payable to order or bearer but to a specifically designated third party. Thus, the electronic messages are not bills of exchange. As there was no bill of exchange or order for the payment drawn abroad and made payable here in the Philippines, there could have been no acceptance or payment that will trigger the imposition of the DST under Section 181 of the Tax Code.

Section 181 of the 1997 Tax Code, which governs HSBC’s claim for tax refund for taxable year 1998 subject of G.R. No. 167728, provides:

SEC. 181. Stamp Tax Upon Acceptance of Bills of Exchange and Others. – Upon any acceptance or payment of any bill of exchange or order for the payment of money purporting to be drawn in a foreign country but payable in the Philippines, there shall be collected a documentary stamp tax of Thirty centavos (P0.30) on each Two hundred pesos (P200), or fractional part thereof, of the face value of any such bill of exchange, or order, or the Philippine equivalent of such value, if expressed in foreign currency. (Emphasis supplied.)

Section 230 of the 1977 Tax Code, as amended, which governs HSBC’s claim for tax refund for DST paid during the period September to December 1997 and subject of

G.R. No. 166018, is worded exactly the same as its counterpart provision in the 1997 Tax Code quoted above.

The origin of the above provision is Section 117 of the Tax Code of 1904,17 which provided: SECTION 117. The acceptor or acceptors of any bill of exchange or order for the payment of any sum of money drawn or purporting to be drawn in any foreign country but payable in the Philippine Islands, shall, before paying or accepting the same, place thereupon a stamp in payment of the tax upon such document in the same manner as is required in this Act for the stamping of inland bills of exchange or promissory notes, and no bill of exchange shall be paid nor negotiated until such stamp shall have been affixed thereto.18 (Emphasis supplied.)

It then became Section 30(h) of the 1914 Tax Code19:

SEC. 30. Stamp tax upon documents and papers. – Upon documents, instruments, and papers, and upon acceptances, assignments, sales, and transfers of the obligation, right, or property incident thereto documentary taxes for and in respect of the transaction so had or accomplished shall be paid as hereinafter prescribed, by the persons making, signing, issuing, accepting, or transferring the same, and at the time such act is done or transaction had:

x x x x

(h) Upon any acceptance or payment upon acceptance of any bill of exchange or order for the payment of money purporting to be drawn in a foreign country but payable in the Philippine Islands, on each two hundred pesos, or fractional part thereof, of the face value of any such bill of exchange or order, or the Philippine equivalent of such value, if expressed in foreign currency, two centavos[.] (Emphasis supplied.)

It was implemented by Section 46 in relation to Section 39 of Revenue Regulations No. 26,20 as amended:

SEC. 39. A Bill of Exchange is one that "denotes checks, drafts, and all other kinds of orders for the payment of money, payable at sight or on demand, or after a specific period after sight or from a stated date."

SEC. 46. Bill of Exchange, etc. – When any bill of exchange or order for the payment of money drawn in a foreign country but payable in this country whether at sight or

14


on demand or after a specified period after sight or from a stated date, is presented for acceptance or payment, there must be affixed upon acceptance or payment of documentary stamp equal to P0.02 for each P200 or fractional part thereof. (Emphasis supplied.)

It took its present form in Section 218 of the Tax Code of 1939,21 which provided:

SEC. 218. Stamp Tax Upon Acceptance of Bills of Exchange and Others. – Upon any acceptance or payment of any bill of exchange or order for the payment of money purporting to be drawn in a foreign country but payable in the Philippines, there shall be collected a documentary stamp tax of four centavos on each two hundred pesos, or fractional part thereof, of the face value of any such bill of exchange or order, or the Philippine equivalent of such value, if expressed in foreign currency. (Emphasis supplied.)

It then became Section 230 of the 1977 Tax Code,22 as amended by Presidential Decree Nos. 1457 and 1959,which, as stated earlier, was worded exactly as Section 181 of the current Tax Code:

SEC. 230. Stamp tax upon acceptance of bills of exchange and others. – Upon any acceptance or payment of any bill of exchange or order for the payment of money purporting to be drawn in a foreign country but payable in the Philippines, there shall be collected a documentary stamp tax of thirty centavos on each two hundred pesos, or fractional part thereof, of the face value of any such bill of exchange, or order, or the Philippine equivalent of such value, if expressed in foreign currency. (Emphasis supplied.)

The pertinent provision of the present Tax Code has therefore remained substantially the same for the past one hundred years.1âwphi1 The identical text and common history of Section 230 of the 1977 Tax Code, as amended, and the 1997 Tax Code, as amended, show that the law imposes DST on either (a) the acceptance or (b) the payment of a foreign bill of exchange or order for the payment of money that was drawn abroad but payable in the Philippines.

DST is an excise tax on the exercise of a right or privilege to transfer obligations, rights or properties incident thereto.23 Under Section 173 of the 1997 Tax Code, the persons primarily liable for the payment of the DST are those (1) making, (2) signing, (3) issuing, (4) accepting, or (5) transferring the taxable documents, instruments or papers.24

In general, DST is levied on the exercise by persons of certain privileges conferred by law for the creation, revision, or termination of specific legal relationships through the execution of specific instruments. Examples of such privileges, the exercise of which, as effected through the issuance of particular documents, are subject to the payment of DST are leases of lands, mortgages, pledges and trusts, and conveyances of real property.25

As stated above, Section 230 of the 1977 Tax Code, as amended, now Section 181 of the 1997 Tax Code, levies DST on either (a) the acceptance or (b) the payment of a foreign bill of exchange or order for the payment of money that was drawn abroad but payable in the Philippines. In other words, it levies DST as an excise tax on the privilege of the drawee to accept or pay a bill of exchange or order for the payment of money, which has been drawn abroad but payable in the Philippines, and on the corresponding privilege of the drawer to have acceptance of or payment for the bill of exchange or order for the payment of money which it has drawn abroad but payable in the Philippines.

Acceptance applies only to bills of exchange.26 Acceptance of a bill of exchange has a very definite meaning in law.27 In particular, Section 132 of the Negotiable Instruments Law provides:

Sec. 132. Acceptance; how made, by and so forth. – The acceptance of a bill [of exchange28] is the signification by the drawee of his assent to the order of the drawer. The acceptance must be in writing and signed by the drawee. It must not express that the drawee will perform his promise by any other means than the payment of money.

Under the law, therefore, what is accepted is a bill of exchange, and the acceptance of a bill of exchange is both the manifestation of the drawee’s consent to the drawer’s order to pay money and the expression of the drawee’s promise to pay. It is "the act by which the drawee manifests his consent to comply with the request contained in the bill of exchange directed to him and it contemplates an engagement or promise to pay."29 Once the drawee accepts, he becomes an acceptor.30 As acceptor, he engages to pay the bill of exchange according to the tenor of his acceptance.31

Acceptance is made upon presentment of the bill of exchange, or within 24 hours after such presentment.32Presentment for acceptance is the production or exhibition of the bill of exchange to the drawee for the purpose of obtaining his acceptance.33

15


Presentment for acceptance is necessary only in the instances where the law requires it.34 In the instances where presentment for acceptance is not necessary, the holder of the bill of exchange can proceed directly to presentment for payment.

Presentment for payment is the presentation of the instrument to the person primarily liable for the purpose of demanding and obtaining payment thereof.35

Thus, whether it be presentment for acceptance or presentment for payment, the negotiable instrument has to be produced and shown to the drawee for acceptance or to the acceptor for payment.

Revenue Regulations No. 26 recognizes that the acceptance or payment (of bills of exchange or orders for the payment of money that have been drawn abroad but payable in the Philippines) that is subjected to DST under Section 181 of the 1997 Tax Code is done after presentment for acceptance or presentment for payment, respectively. In other words, the acceptance or payment of the subject bill of exchange or order for the payment of money is done when there is presentment either for acceptance or for payment of the bill of exchange or order for the payment of money.

Applying the above concepts to the matter subjected to DST in these cases, the electronic messages received by HSBC from its investor-clients abroad instructing the former to debit the latter's local and foreign currency accounts and to pay the purchase price of shares of stock or investment in securities do not properly qualify as either presentment for acceptance or presentment for payment. There being neither presentment for acceptance nor presentment for payment, then there was no acceptance or payment that could have been subjected to DST to speak of.

Indeed, there had been no acceptance of a bill of exchange or order for the payment of money on the part of HSBC. To reiterate, there was no bill of exchange or order for the payment drawn abroad and made payable here in the Philippines. Thus, there was no acceptance as the electronic messages did not constitute the written and signed manifestation of HSBC to a drawer's order to pay money. As HSBC could not have been an acceptor, then it could not have made any payment of a bill of exchange or order for the payment of money drawn abroad but payable here in the Philippines. In other words, HSBC could not have been held liable for DST under Section 230 of the 1977 Tax Code, as amended, and Section 181 of the 1997 Tax Code as it is not "a person making, signing, issuing, accepting, or, transferring" the taxable instruments under the said provision. Thus, HSBC

erroneously paid DST on the said electronic messages for which it is entitled to a tax refund.

WHEREFORE, the petitions are hereby GRANTED and the Decisions dated May 2, 2002 in CTA Case No. 6009 and dated December 18, 2002 in CT A Case No. 5951 of the Court of Tax Appeals are REINSTATED.

SO ORDERED.

16


G.R. No. 170325 September 26, 2008

PHILIPPINE NATIONAL BANK, Petitioner, vs. ERLANDO T. RODRIGUEZ and NORMA RODRIGUEZ, Respondents.

REYES, R.T., J.:

WHEN the payee of the check is not intended to be the true recipient of its proceeds, is it payable to order or bearer? What is the fictitious-payee rule and who is liable under it? Is there any exception?

These questions seek answers in this petition for review on certiorari of the Amended Decision1 of the Court of Appeals (CA) which affirmed with modification that of the Regional Trial Court (RTC).2

The Facts

The facts as borne by the records are as follows:

Respondents-Spouses Erlando and Norma Rodriguez were clients of petitioner Philippine National Bank (PNB), Amelia Avenue Branch, Cebu City. They maintained savings and demand/checking accounts, namely, PNBig Demand Deposits (Checking/Current Account No. 810624-6 under the account name Erlando and/or Norma Rodriguez), and PNBig Demand Deposit (Checking/Current Account No. 810480-4 under the account name Erlando T. Rodriguez).

The spouses were engaged in the informal lending business. In line with their business, they had a discounting3 arrangement with the Philnabank Employees Savings and Loan Association (PEMSLA), an association of PNB employees.

Naturally, PEMSLA was likewise a client of PNB Amelia Avenue Branch. The association maintained current and savings accounts with petitioner bank.

PEMSLA regularly granted loans to its members. Spouses Rodriguez would rediscount the postdated checks issued to members whenever the association was short of funds. As was customary, the spouses would replace the postdated checks with their own checks issued in the name of the members.

It was PEMSLA’s policy not to approve applications for loans of members with outstanding debts. To subvert this policy, some PEMSLA officers devised a scheme to obtain additional loans despite their outstanding loan accounts. They took out loans in the names of unknowing members, without the knowledge or consent of the latter. The PEMSLA checks issued for these loans were then given to the spouses for rediscounting. The officers carried this out by forging the indorsement of the named payees in the checks.

In return, the spouses issued their personal checks (Rodriguez checks) in the name of the members and delivered the checks to an officer of PEMSLA. The PEMSLA checks, on the other hand, were deposited by the spouses to their account.

Meanwhile, the Rodriguez checks were deposited directly by PEMSLA to its savings account without any indorsement from the named payees. This was an irregular procedure made possible through the facilitation of Edmundo Palermo, Jr., treasurer of PEMSLA and bank teller in the PNB Branch. It appears that this became the usual practice for the parties.

For the period November 1998 to February 1999, the spouses issued sixty nine (69) checks, in the total amount of P2,345,804.00. These were payable to forty seven (47) individual payees who were all members of PEMSLA.4

Petitioner PNB eventually found out about these fraudulent acts. To put a stop to this scheme, PNB closed the current account of PEMSLA. As a result, the PEMSLA checks deposited by the spouses were returned or dishonored for the reason "Account Closed." The corresponding Rodriguez checks, however, were deposited as usual to the PEMSLA savings account. The amounts were duly debited from the Rodriguez account. Thus, because the PEMSLA checks given as payment were returned, spouses Rodriguez incurred losses from the rediscounting transactions.

RTC Disposition

17

http://www.lawphil.net/judjuris/juri2008/sep2008/gr_170325_2008.html#fnt4





Alarmed over the unexpected turn of events, the spouses Rodriguez filed a civil complaint for damages against PEMSLA, the Multi-Purpose Cooperative of Philnabankers (MCP), and petitioner PNB. They sought to recover the value of their checks that were deposited to the PEMSLA savings account amounting to P2,345,804.00. The spouses contended that because PNB credited the checks to the PEMSLA account even without indorsements, PNB violated its contractual obligation to them as depositors. PNB paid the wrong payees, hence, it should bear the loss.

PNB moved to dismiss the complaint on the ground of lack of cause of action. PNB argued that the claim for damages should come from the payees of the checks, and not from spouses Rodriguez. Since there was no demand from the said payees, the obligation should be considered as discharged.

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

In its Answer,5 PNB claimed it is not liable for the checks which it paid to the PEMSLA account without any indorsement from the payees. The bank contended that spouses Rodriguez, the makers, actually did not intend for the named payees to receive the proceeds of the checks. Consequently, the payees were considered as "fictitious payees" as defined under the Negotiable Instruments Law (NIL). Being checks made to fictitious payees which are bearer instruments, the checks were negotiable by mere delivery. PNB’s Answer included its cross-claim against its co-defendants PEMSLA and the MCP, praying that in the event that judgment is rendered against the bank, the cross-defendants should be ordered to reimburse PNB the amount it shall pay.

After trial, the RTC rendered judgment in favor of spouses Rodriguez (plaintiffs). It ruled that PNB (defendant) is liable to return the value of the checks. All counterclaims and cross-claims were dismissed. The dispositive portion of the RTC decision reads:

WHEREFORE, in view of the foregoing, the Court hereby renders judgment, as follows:

1. Defendant is hereby ordered to pay the plaintiffs the total amount of P2,345,804.00 or reinstate or restore the amount of P775,337.00 in the PNBig Demand Deposit Checking/Current Account No. 810480-4 of Erlando T. Rodriguez, and the amount of P1,570,467.00 in the PNBig Demand Deposit, Checking/Current Account No. 810624-6 of Erlando T. Rodriguez and/or Norma

Rodriguez, plus legal rate of interest thereon to be computed from the filing of this complaint until fully paid;

2. The defendant PNB is hereby ordered to pay the plaintiffs the following reasonable amount of damages suffered by them taking into consideration the standing of the plaintiffs being sugarcane planters, realtors, residential subdivision owners, and other businesses:

a. Consequential damages, unearned income in the amount of P4,000,000.00, as a result of their having incurred great dificulty (sic) especially in the residential subdivision business, which was not pushed through and the contractor even threatened to file a case against the plaintiffs;

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

c. Exemplary damages in the amount of P500,000.00;

d. Attorney’s fees in the amount of P150,000.00 considering that this case does not involve very complicated issues; and for the

e. Costs of suit.

3. Other claims and counterclaims are hereby dismissed.6

CA Disposition

PNB appealed the decision of the trial court to the CA on the principal ground that the disputed checks should be considered as payable to bearer and not to order.

In a Decision7 dated July 22, 2004, the CA reversed and set aside the RTC disposition. The CA concluded that the checks were obviously meant by the spouses to be really paid to PEMSLA. The court a quo declared:

We are not swayed by the contention of the plaintiffs-appellees (Spouses Rodriguez) that their cause of action arose from the alleged breach of contract by the defendant-appellant (PNB) when it paid the value of the checks to PEMSLA despite the checks being payable to order. Rather, we are more convinced by the strong and credible evidence for the defendant-appellant with regard to the

18





plaintiffs-appellees’ and PEMSLA’s business arrangement – that the value of the rediscounted checks of the plaintiffs-appellees would be deposited in PEMSLA’s account for payment of the loans it has approved in exchange for PEMSLA’s checks with the full value of the said loans. This is the only obvious explanation as to why all the disputed sixty-nine (69) checks were in the possession of PEMSLA’s errand boy for presentment to the defendant-appellant that led to this present controversy. It also appears that the teller who accepted the said checks was PEMSLA’s officer, and that such was a regular practice by the parties until the defendant-appellant discovered the scam. The logical conclusion, therefore, is that the checks were never meant to be paid to order, but instead, to PEMSLA. We thus find no breach of contract on the part of the defendant-appellant.

According to plaintiff-appellee Erlando Rodriguez’ testimony, PEMSLA allegedly issued post-dated checks to its qualified members who had applied for loans. However, because of PEMSLA’s insufficiency of funds, PEMSLA approached the plaintiffs-appellees for the latter to issue rediscounted checks in favor of said applicant members. Based on the investigation of the defendant-appellant, meanwhile, this arrangement allowed the plaintiffs-appellees to make a profit by issuing rediscounted checks, while the officers of PEMSLA and other members would be able to claim their loans, despite the fact that they were disqualified for one reason or another. They were able to achieve this conspiracy by using other members who had loaned lesser amounts of money or had not applied at all. x x x.8 (Emphasis added)

The CA found that the checks were bearer instruments, thus they do not require indorsement for negotiation; and that spouses Rodriguez and PEMSLA conspired with each other to accomplish this money-making scheme. The payees in the checks were "fictitious payees" because they were not the intended payees at all.

The spouses Rodriguez moved for reconsideration. They argued, inter alia, that the checks on their faces were unquestionably payable to order; and that PNB committed a breach of contract when it paid the value of the checks to PEMSLA without indorsement from the payees. They also argued that their cause of action is not only against PEMSLA but also against PNB to recover the value of the checks.

On October 11, 2005, the CA reversed itself via an Amended Decision, the last paragraph and fallo of which read:

In sum, we rule that the defendant-appellant PNB is liable to the plaintiffs-appellees Sps. Rodriguez for the following:

1. Actual damages in the amount of P2,345,804 with interest at 6% per annum from 14 May 1999 until fully paid;

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

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

4. Costs of suit.

WHEREFORE, in view of the foregoing premises, judgment is hereby rendered by Us AFFIRMING WITH MODIFICATION the assailed decision rendered in Civil Case No. 99-10892, as set forth in the immediately next preceding paragraph hereof, and SETTING ASIDE Our original decision promulgated in this case on 22 July 2004.

SO ORDERED.9

The CA ruled that the checks were payable to order. According to the appellate court, PNB failed to present sufficient proof to defeat the claim of the spouses Rodriguez that they really intended the checks to be received by the specified payees. Thus, PNB is liable for the value of the checks which it paid to PEMSLA without indorsements from the named payees. The award for damages was deemed appropriate in view of the failure of PNB to treat the Rodriguez account with the highest degree of care considering the fiduciary nature of their relationship, which constrained respondents to seek legal action. Hence, the present recourse under Rule 45.

Issues

The issues may be compressed to whether the subject checks are payable to order or to bearer and who bears the loss?

PNB argues anew that when the spouses Rodriguez issued the disputed checks, they did not intend for the named payees to receive the proceeds. Thus, they are bearer instruments that could be validly negotiated by mere delivery. Further, testimonial and documentary evidence presented during trial amply proved that spouses Rodriguez and the officers of PEMSLA conspired with each other to defraud the bank.

Our Ruling

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Prefatorily, amendment of decisions is more acceptable than an erroneous judgment attaining finality to the prejudice of innocent parties. A court discovering an erroneous judgment before it becomes final may, motu proprio or upon motion of the parties, correct its judgment with the singular objective of achieving justice for the litigants.10

However, a word of caution to lower courts, the CA in Cebu in this particular case, is in order. The Court does not sanction careless disposition of cases by courts of justice. The highest degree of diligence must go into the study of every controversy submitted for decision by litigants. Every issue and factual detail must be closely scrutinized and analyzed, and all the applicable laws judiciously studied, before the promulgation of every judgment by the court. Only in this manner will errors in judgments be avoided.

Now to the core of the petition.

As a rule, when the payee is fictitious or not intended to be the true recipient of the proceeds, the check is considered as a bearer instrument. A check is "a bill of exchange drawn on a bank payable on demand."11 It is either an order or a bearer instrument. Sections 8 and 9 of the NIL states:

SEC. 8. When payable to order. – The instrument is payable to order where it is drawn payable to the order of a specified person or to him or his order. It may be drawn payable to the order of –

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

(b) The drawer or maker; or

(c) The drawee; or

(d) Two or more payees jointly; or

(e) One or some of several payees; or

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

Where the instrument is payable to order, the payee must be named or otherwise indicated therein with reasonable certainty.

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

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

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

(c) When it is payable to the order of a fictitious or non-existing person, and such fact is known to the person making it so payable; or

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

(e) Where the only or last indorsement is an indorsement in blank.12 (Underscoring supplied)

The distinction between bearer and order instruments lies in their manner of negotiation. Under Section 30 of the NIL, an order instrument requires an indorsement from the payee or holder before it may be validly negotiated. A bearer instrument, on the other hand, does not require an indorsement to be validly negotiated. It is negotiable by mere delivery. The provision reads:

SEC. 30. What constitutes negotiation. – An instrument is negotiated when it is transferred from one person to another in such manner as to constitute the transferee the holder thereof. If payable to bearer, it is negotiated by delivery; if payable to order, it is negotiated by the indorsement of the holder completed by delivery.

A check that is payable to a specified payee is an order instrument. However, under Section 9(c) of the NIL, a check payable to a specified payee may nevertheless be considered as a bearer instrument if it is payable to the order of a fictitious or non-existing person, and such fact is known to the person making it so payable. Thus, checks issued to "Prinsipe Abante" or "Si Malakas at si Maganda," who are well-known characters in Philippine mythology, are bearer instruments because the named payees are fictitious and non-existent.

We have yet to discuss a broader meaning of the term "fictitious" as used in the NIL. It is for this reason that We look elsewhere for guidance. Court rulings in the United States are a logical starting point since our law on negotiable instruments was directly lifted from the Uniform Negotiable Instruments Law of the United States.13

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A review of US jurisprudence yields that an actual, existing, and living payee may also be "fictitious" if the maker of the check did not intend for the payee to in fact receive the proceeds of the check. This usually occurs when the maker places a name of an existing payee on the check for convenience or to cover up an illegal activity.14 Thus, a check made expressly payable to a non-fictitious and existing person is not necessarily an order instrument. If the payee is not the intended recipient of the proceeds of the check, the payee is considered a "fictitious" payee and the check is a bearer instrument.

In a fictitious-payee situation, the drawee bank is absolved from liability and the drawer bears the loss. When faced with a check payable to a fictitious payee, it is treated as a bearer instrument that can be negotiated by delivery. The underlying theory is that one cannot expect a fictitious payee to negotiate the check by placing his indorsement thereon. And since the maker knew this limitation, he must have intended for the instrument to be negotiated by mere delivery. Thus, in case of controversy, the drawer of the check will bear the loss. This rule is justified for otherwise, it will be most convenient for the maker who desires to escape payment of the check to always deny the validity of the indorsement. This despite the fact that the fictitious payee was purposely named without any intention that the payee should receive the proceeds of the check.15

The fictitious-payee rule is best illustrated in Mueller & Martin v. Liberty Insurance Bank.16 In the said case, the corporation Mueller & Martin was defrauded by George L. Martin, one of its authorized signatories. Martin drew seven checks payable to the German Savings Fund Company Building Association (GSFCBA) amounting to $2,972.50 against the account of the corporation without authority from the latter. Martin was also an officer of the GSFCBA but did not have signing authority. At the back of the checks, Martin placed the rubber stamp of the GSFCBA and signed his own name as indorsement. He then successfully drew the funds from Liberty Insurance Bank for his own personal profit. When the corporation filed an action against the bank to recover the amount of the checks, the claim was denied.

The US Supreme Court held in Mueller that when the person making the check so payable did not intend for the specified payee to have any part in the transactions, the payee is considered as a fictitious payee. The check is then considered as a bearer instrument to be validly negotiated by mere delivery. Thus, the US Supreme Court held that Liberty Insurance Bank, as drawee, was authorized to make payment to the bearer of the check, regardless of whether prior indorsements were genuine or not.17

The more recent Getty Petroleum Corp. v. American Express Travel Related Services Company, Inc.18 upheld the fictitious-payee rule. The rule protects the depositary bank and assigns the loss to the drawer of the check who was in a better position to prevent the loss in the first place. Due care is not even required from the drawee or depositary bank in accepting and paying the checks. The effect is that a showing of negligence on the part of the depositary bank will not defeat the protection that is derived from this rule.

However, there is a commercial bad faith exception to the fictitious-payee rule. A showing of commercial bad faith on the part of the drawee bank, or any transferee of the check for that matter, will work to strip it of this defense. The exception will cause it to bear the loss. Commercial bad faith is present if the transferee of the check acts dishonestly, and is a party to the fraudulent scheme. Said the US Supreme Court in Getty:

Consequently, a transferee’s lapse of wary vigilance, disregard of suspicious circumstances which might have well induced a prudent banker to investigate and other permutations of negligence are not relevant considerations under Section 3-405 x x x. Rather, there is a "commercial bad faith" exception to UCC 3-405, applicable when the transferee "acts dishonestly – where it has actual knowledge of facts and circumstances that amount to bad faith, thus itself becoming a participant in a fraudulent scheme. x x x Such a test finds support in the text of the Code, which omits a standard of care requirement from UCC 3-405 but imposes on all parties an obligation to act with "honesty in fact." x x x19 (Emphasis added)

Getty also laid the principle that the fictitious-payee rule extends protection even to non-bank transferees of the checks.

In the case under review, the Rodriguez checks were payable to specified payees. It is unrefuted that the 69 checks were payable to specific persons. Likewise, it is uncontroverted that the payees were actual, existing, and living persons who were members of PEMSLA that had a rediscounting arrangement with spouses Rodriguez.

What remains to be determined is if the payees, though existing persons, were "fictitious" in its broader context.

For the fictitious-payee rule to be available as a defense, PNB must show that the makers did not intend for the named payees to be part of the transaction involving the checks. At most, the bank’s thesis shows that the payees did not have knowledge of the existence of the checks. This lack of knowledge on the part of the

21








payees, however, was not tantamount to a lack of intention on the part of respondents-spouses that the payees would not receive the checks’ proceeds. Considering that respondents-spouses were transacting with PEMSLA and not the individual payees, it is understandable that they relied on the information given by the officers of PEMSLA that the payees would be receiving the checks.

Verily, the subject checks are presumed order instruments. This is because, as found by both lower courts, PNB failed to present sufficient evidence to defeat the claim of respondents-spouses that the named payees were the intended recipients of the checks’ proceeds. The bank failed to satisfy a requisite condition of a fictitious-payee situation – that the maker of the check intended for the payee to have no interest in the transaction.

Because of a failure to show that the payees were "fictitious" in its broader sense, the fictitious-payee rule does not apply. Thus, the checks are to be deemed payable to order. Consequently, the drawee bank bears the loss.20

PNB was remiss in its duty as the drawee bank. It does not dispute the fact that its teller or tellers accepted the 69 checks for deposit to the PEMSLA account even without any indorsement from the named payees. It bears stressing that order instruments can only be negotiated with a valid indorsement.

A bank that regularly processes checks that are neither payable to the customer nor duly indorsed by the payee is apparently grossly negligent in its operations.21 This Court has recognized the unique public interest possessed by the banking industry and the need for the people to have full trust and confidence in their banks.22 For this reason, banks are minded to treat their customer’s accounts with utmost care, confidence, and honesty.23

In a checking transaction, the drawee bank has the duty to verify the genuineness of the signature of the drawer and to pay the check strictly in accordance with the drawer’s instructions, i.e., to the named payee in the check. It should charge to the drawer’s accounts only the payables authorized by the latter. Otherwise, the drawee will be violating the instructions of the drawer and it shall be liable for the amount charged to the drawer’s account.24

In the case at bar, respondents-spouses were the bank’s depositors. The checks were drawn against respondents-spouses’ accounts. PNB, as the drawee bank, had the responsibility to ascertain the regularity of the indorsements, and the genuineness of the signatures on the checks before accepting them for deposit.

Lastly, PNB was obligated to pay the checks in strict accordance with the instructions of the drawers. Petitioner miserably failed to discharge this burden.

The checks were presented to PNB for deposit by a representative of PEMSLA absent any type of indorsement, forged or otherwise. The facts clearly show that the bank did not pay the checks in strict accordance with the instructions of the drawers, respondents-spouses. Instead, it paid the values of the checks not to the named payees or their order, but to PEMSLA, a third party to the transaction between the drawers and the payees.alf-ITC

Moreover, PNB was negligent in the selection and supervision of its employees. The trustworthiness of bank employees is indispensable to maintain the stability of the banking industry. Thus, banks are enjoined to be extra vigilant in the management and supervision of their employees. In Bank of the Philippine Islands v. Court of Appeals,25 this Court cautioned thus:

Banks handle daily transactions involving millions of pesos. By the very nature of their work the degree of responsibility, care and trustworthiness expected of their employees and officials is far greater than those of ordinary clerks and employees. For obvious reasons, the banks are expected to exercise the highest degree of diligence in the selection and supervision of their employees.26

PNB’s tellers and officers, in violation of banking rules of procedure, permitted the invalid deposits of checks to the PEMSLA account. Indeed, when it is the gross negligence of the bank employees that caused the loss, the bank should be held liable.27

PNB’s argument that there is no loss to compensate since no demand for payment has been made by the payees must also fail. Damage was caused to respondents-spouses when the PEMSLA checks they deposited were returned for the reason "Account Closed." These PEMSLA checks were the corresponding payments to the Rodriguez checks. Since they could not encash the PEMSLA checks, respondents-spouses were unable to collect payments for the amounts they had advanced.

A bank that has been remiss in its duty must suffer the consequences of its negligence. Being issued to named payees, PNB was duty-bound by law and by banking rules and procedure to require that the checks be properly indorsed before accepting them for deposit and payment. In fine, PNB should be held liable for the amounts of the checks.

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One Last Note

We note that the RTC failed to thresh out the merits of PNB’s cross-claim against its co-defendants PEMSLA and MPC. The records are bereft of any pleading filed by these two defendants in answer to the complaint of respondents-spouses and cross-claim of PNB. The Rules expressly provide that failure to file an answer is a ground for a declaration that defendant is in default.28 Yet, the RTC failed to sanction the failure of both PEMSLA and MPC to file responsive pleadings. Verily, the RTC dismissal of PNB’s cross-claim has no basis. Thus, this judgment shall be without prejudice to whatever action the bank might take against its co-defendants in the trial court.

To PNB’s credit, it became involved in the controversial transaction not of its own volition but due to the actions of some of its employees. Considering that moral damages must be understood to be in concept of grants, not punitive or corrective in nature, We resolve to reduce the award of moral damages to P50,000.00.29

WHEREFORE, the appealed Amended Decision is AFFIRMED with the MODIFICATION that the award for moral damages is reduced to P50,000.00, and that this is without prejudice to whatever civil, criminal, or administrative action PNB might take against PEMSLA, MPC, and the employees involved. SO ORDERED.

G.R. No. 93397 March 3, 1997

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

TORRES, JR., J.:

Assailed in this Petition for Review on Certiorari is the Decision of the respondent Court of Appeals dated January 29, 1990, 1 affirming the nullity of the transfer of Central Bank Certificate of Indebtedness (CBCI) No. D891, 2 with a face value of P500,000.00, from the Philippine Underwriters Finance Corporation (Philfinance) to the petitioner Trader's Royal Bank (TRB), under a Repurchase Agreement 3 dated February 4, 1981, and a Detached Assignment 4 dated April 27, 1981.

Docketed as Civil Case No. 83-17966 in the Regional Trial Court of Manila, Branch 32, the action was originally filed as a Petition for Mandamus 5 under Rule 65 of the

Rules of Court, to compel the Central Bank of the Philippines to register the transfer of the subject CBCI to petitioner Traders Royal Bank (TRB).

In the said petition, TRB stated that:

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

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

5. On February 4, 1981, petitioner entered into a Repurchase Agreement with PhilFinance . . ., whereby, for and in consideration of the sum of PESOS: FIVE HUNDRED THOUSAND (P500,000.00), PhilFinance sold, transferred and delivered to petitioner CBCI 4-year, 8th series, Serial No. D891 with a face value of P500,000.00 . . ., which CBCI was among those previously acquired by PhilFinance from Filriters as averred in paragraph 3 of the Petition;

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

7. PhilFinance failed to repurchase the CBCI on the agreed date of maturity, April 27, 1981, when the checks it issued in favor of petitioner were dishonored for insufficient funds;

8. Owing to the default of PhilFinance, it executed a Detached Assignment in favor of the Petitioner to enable the latter to have its title completed and registered in the books of the respondent. And by means of said Detachment, Philfinance transferred and assigned all, its rights and title in the said CBCI (Annex "C") to

23




petitioner and, furthermore, it did thereby "irrevocably authorize the said issuer (respondent herein) to transfer the said bond/certificate on the books of its fiscal agent." . . .

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

10. Respondent failed and refused to register the transfer as requested, and continues to do so notwithstanding petitioner's valid and just title over the same and despite repeated demands in writing, the latest of which is hereto attached as Annex "E" and made an integral part hereof;

11. The express provisions governing the transfer of the CBCI were substantially complied with the petitioner's request for registration, to wit:

"No transfer thereof shall be valid unless made at said office (where the Certificate has been registered) by the registered owner hereof, in person or by his attorney duly authorized in writing, and similarly noted hereon, and upon payment of a nominal transfer fee which may be required, a new Certificate shall be issued to the transferee of the registered holder thereof."

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

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

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

On December 4, 1984, the Regional Trial Court the case took cognizance of the defendant Central Bank of the Philippines' Motion for Admission of Amended Answer with Counter Claim for Interpleader 6 thereby calling to fore the respondent

Filriters Guaranty Assurance Corporation (Filriters), the registered owner of the subject CBCI as respondent.

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

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

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

13. Without any consideration or benefit whatsoever to Filriters, in violation of law and the trust fund doctrine and to the prejudice of policyholders and to all who have present or future claim against policies issued by Filriters, Alfredo Banaria, then Senior Vice-President-Treasury of Filriters, without any board resolution, knowledge or consent of the board of directors of Filriters, and without any clearance or authorization from the Insurance Commissioner, executed a detached assignment purportedly assigning CBCI No. 891 to Philfinance;

xxx xxx xxx

14. Subsequently, Alberto Fabella, Senior Vice-President-Comptroller are Pilar Jacobe, Vice-President-Treasury of Filriters (both of whom were holding the same positions in Philfinance), without any consideration or benefit redounding to Filriters and to the grave prejudice of Filriters, its policy holders and all who have present or future claims against its policies, executed similar detached assignment forms transferring the CBCI to plaintiff;

xxx xxx xxx

15. The detached assignment is patently void and inoperative because the assignment is without the knowledge and consent of directors of Filriters, and not duly authorized in writing by the Board, as requiring by Article V, Section 3 of CB Circular No. 769;

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

24


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

b. The assignment was executed without any knowledge and consent of the board of directors of Filriters;

c. The CBCI constitutes reserve investment of Filriters against liabilities, which is a requirement under the Insurance Code for its existence as an insurance company and the pursuit of its business operations. The assignment of the CBCI is illegal act in the sense of malum in se or malum prohibitum, for anyone to make, either as corporate or personal act;

d. The transfer of dimunition of reserve investments of Filriters is expressly prohibited by law, is immoral and against public policy;

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

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

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

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

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

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

a. The CBCI constitutes part of the reserve investments of Filriters against liabilities requires by the Insurance Code and its assignment or

transfer is expressly prohibited by law. There was no attempt to get any clearance or authorization from the Insurance Commissioner;

b. The assignment by Filriters of the CBCI is clearly not a transaction in the usual or regular course of its business;

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

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

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

d. Declaring the assignment of CBCI No. 891 in favor of PhilFinance, and the subsequent assignment of CBCI by PhilFinance in favor of the plaintiff Traders Royal Bank as null and void and of no force and effect;

e. Ordering the respondent Central Bank of the Philippines to disregard the said assignment and to pay the value of the proceeds of the CBCI No. D891 to the Filriters Guaranty Assurance Corporation;

f. Ordering the plaintiff Traders Royal Bank to pay respondent Filriters Guaranty Assurance Corp. The sum of P10,000 as attorney's fees; and

g. to pay the costs.

SO ORDERED. 9

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

The records reveal that defendant Filriters is the registered owner of CBCI No. D891. Under a deed of assignment dated November 27, 1971, Filriters transferred CBCI No. D891 to Philippine Underwriters Finance Corporation (Philfinance). Subsequently, Philfinance transferred CBCI No. D891, which was still registered in the name of Filriters, to appellant Traders Royal Bank

25


(TRB). The transfer was made under a repurchase agreement dated February 4, 1981, granting Philfinance the right to repurchase the instrument on or before April 27, 1981. When Philfinance failed to buy back the note on maturity date, it executed a deed of assignment, dated April 27, 1981, conveying to appellant TRB all its right and the title to CBCI No. D891.

Armed with the deed of assignment, TRB then sought the transfer and registration of CBCI No. D891 in its name before the Security and Servicing Department of the Central Bank (CB). Central Bank, however, refused to effect the transfer and registration in view of an adverse claim filed by defendant Filriters.

Left with no other recourse, TRB filed a special civil action for mandamus against the Central Bank in the Regional Trial Court of Manila. The suit, however, was subsequently treated by the lower court as a case of interpleader when CB prayed in its amended answer that Filriters be impleaded as a respondent and the court adjudge which of them is entitled to the ownership of CBCI No. D891. Failing to get a favorable judgment. TRB now comes to this Court on appeal. 11

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

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

Obviously, the assignment of the certificate from Filriters to Philfinance was fictitious, having made without consideration, and did not conform to Central Bank Circular No. 769, series of 1980, better known as the "Rules and Regulations Governing Central Bank Certificates of Indebtedness", which provided that any "assignment of registered certificates shall not be valid unless made . . . by the

registered owner thereof in person or by his representative duly authorized in writing."

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

Said the Court:

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

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

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

SO ORDERED. 13

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

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

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The pertinent portions of the subject CBCI read:

xxx xxx xxx

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

xxx xxx xxx

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

The appellate court ruled that the subject CBCI is not a negotiable instrument, stating that:

As worded, the instrument provides a promise "to pay Filriters Guaranty Assurance Corporation, the registered owner hereof." Very clearly, the instrument is payable only to Filriters, the registered owner, whose name is inscribed thereon. It lacks the words of negotiability which should have served as an expression of consent that the instrument may be transferred by negotiation. 15

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

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

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

The accepted rule is that the negotiability or non-negotiability of an instrument is determined from the writing, that is, from the face of the instrument itself. In the construction of a bill or note, the intention of the parties is to control, if it can be legally ascertained. While the writing may be read in the light of surrounding circumstance in order to more perfectly understand the intent and meaning of the parties, yet as they have constituted the writing to be the only outward and visible expression of their meaning, no other words are to be added to it or substituted in its stead. The duty of the court in such case is to ascertain, not what the parties may have secretly intended as contradistinguished from what their words express, but what is the meaning of the words they have used. What the parties meant must be determined by what they said.

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

The following are the appellate court's pronouncements on the matter:

Clearly shown in the record is the fact that Philfinance's title over CBCI No. D891 is defective since it acquired the instrument from Filriters fictitiously. Although the deed of assignment stated that the transfer was for "value received", there was really no consideration involved. What happened was Philfinance merely borrowed CBCI No. D891 from Filriters, a sister corporation. Thus, for lack of any consideration, the assignment made is a complete nullity.

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

27


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

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

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

Says the petitioner;

Since Philfinance own about 90% of Filriters and the two companies have the same corporate officers, if the principle of piercing the veil of corporate entity were to be applied in this case, then TRB's payment to Philfinance for the CBCI purchased by it could just as well be considered a payment to Filriters, the registered owner of the CBCI as to bar the latter from claiming, as it has, that it never received any payment for that CBCI sold and that said CBCI was sold without its authority.

xxx xxx xxx

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

We disagree with Petitioner.

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

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

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

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

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

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

28


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

TRANSFER. This Certificate shall pass by delivery unless it is registered in the owner's name at any office of the Bank or any agency duly authorized by the Bank, and such registration is noted hereon. After such registration no transfer thereof shall be valid unless made at said office (where the Certificates has been registered) by the registered owner hereof, in person, or by his attorney, duly authorized in writing and similarly noted hereon and upon payment of a nominal transfer fee which may be required, a new Certificate shall be issued to the transferee of the registered owner thereof. The bank or any agency duly authorized by the Bank may deem and treat the bearer of this Certificate, or if this Certificate is registered as herein authorized, the person in whose name the same is registered as the absolute owner of this Certificate, for the purpose of receiving payment hereof, or on account hereof, and for all other purpose whether or not this Certificate shall be overdue.

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

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

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

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

Petitioner, being a commercial bank, cannot feign ignorance of Central Bank Circular 769, and its requirements. An entity which deals with corporate agents within circumstances showing that the agents are acting in excess of corporate

authority, may not hold the corporation liable. 22 This is only fair, as everyone must, in the exercise of his rights and in the performance of his duties, act with justice, give everyone his due, and observe honesty and good faith. 23

The transfer made by Filriters to Philfinance did not conform to the said. Central Bank Circular, which for all intents, is considered part of the law. As found by the courts a quo, Alfredo O. Banaria, who had signed the deed of assignment from Filriters to Philfinance, purportedly for and in favor of Filriters, did not have the necessary written authorization from the Board of Directors of Filriters to act for the latter. As it is, the sale from Filriters to Philfinance was fictitious, and therefore void and inexistent, as there was no consideration for the same. This is fatal to the petitioner's cause, for then, Philfinance had no title over the subject certificate to convey the Traders Royal Bank.Nemo potest nisi quod de jure potest — no man can do anything except what he can do lawfully.

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

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

A Yes, sir.

Q Why do you know this?

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

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

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

Q Legal reserve for the purpose of what?

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

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

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

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

SO ORDERED.

G.R. No. 93073 December 21, 1992

REPUBLIC PLANTERS BANK, petitioner, vs. COURT OF APPEALS and FERMIN CANLAS, respondents.

CAMPOS, JR., J.:

This is an appeal by way of a Petition for Review on Certiorari from the decision * of the Court of Appeals in CA G.R. CV No. 07302, entitled "Republic Planters Bank.Plaintiff-Appellee vs. Pinch Manufacturing Corporation, et al., Defendants, and Fermin Canlas, Defendant-Appellant", which affirmed the decision ** in Civil Case No. 82-5448 except that it completely absolved Fermin Canlas from liability under the promissory notes and reduced the award for damages and attorney's fees. The RTC decision, rendered on June 20, 1985, is quoted hereunder:

WHEREFORE, premises considered, judgment is hereby rendered in favor of the plaintiff Republic Planters Bank, ordering defendant Pinch Manufacturing Corporation (formerly Worldwide Garment Manufacturing, Inc.) and defendants Shozo Yamaguchi and Fermin Canlas to pay, jointly and severally, the plaintiff bank the following sums with interest thereon at 16% per annum from the dates indicated, to wit:

Under the promissory note (Exhibit "A"), the sum of P300,000.00 with interest from January 29, 1981 until fully paid; under promissory note (Exhibit "B"), the sum of P40,000.00 with interest from November 27, 1980; under the promissory note (Exhibit "C"), the sum of P166,466.00 which interest from January 29, 1981; under the promissory note (Exhibit "E"), the sum of P86,130.31 with interest from January 29, 1981; under the promissory note (Exhibit "G"), the sum of P12,703.70 with interest from November 27, 1980; under the promissory note (Exhibit "H"), the sum of P281,875.91 with interest from January 29, 1981; and under the promissory note (Exhibit "I"), the sum of P200,000.00 with interest from January 29, 1981.

Under the promissory note (Exhibit "D") defendants Pinch Manufacturing Corporation (formerly named Worldwide Garment Manufacturing, Inc.), and Shozo Yamaguchi are ordered to pay jointly and severally, the plaintiff bank the sum of P367,000.00 with interest of 16% per annum from January 29, 1980 until fully paid

Under the promissory note (Exhibit "F") defendant corporation Pinch (formerly Worldwide) is ordered to pay the plaintiff bank the sum of P140,000.00 with interest at 16% per annum from November 27, 1980 until fully paid.

Defendant Pinch (formely Worldwide) is hereby ordered to pay the plaintiff the sum of P231,120.81 with interest at 12% per annum from July 1, 1981, until fully paid and the sum of P331,870.97 with interest from March 28, 1981, until fully paid.

All the defendants are also ordered to pay, jointly and severally, the plaintiff the sum of P100,000.00 as and for reasonable attorney's fee and the further sum equivalent to 3% per annum of the respective principal sums from the dates above stated as penalty charge until fully paid, plus one percent (1%) of the principal sums as service charge.

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With costs against the defendants.

SO ORDERED. 1

From the above decision only defendant Fermin Canlas appealed to the then Intermediate Court (now the Court Appeals). His contention was that inasmuch as he signed the promissory notes in his capacity as officer of the defunct Worldwide Garment Manufacturing, Inc, he should not be held personally liable for such authorized corporate acts that he performed. It is now the contention of the petitioner Republic Planters Bank that having unconditionally signed the nine (9) promissory notes with Shozo Yamaguchi, jointly and severally, defendant Fermin Canlas is solidarity liable with Shozo Yamaguchi on each of the nine notes.

We find merit in this appeal.

From the records, these facts are established: Defendant Shozo Yamaguchi and private respondent Fermin Canlas were President/Chief Operating Officer and Treasurer respectively, of Worldwide Garment Manufacturing, Inc.. By virtue of Board Resolution No.1 dated August 1, 1979, defendant Shozo Yamaguchi and private respondent Fermin Canlas were authorized to apply for credit facilities with the petitioner Republic Planters Bank in the forms of export advances and letters of credit/trust receipts accommodations. Petitioner bank issued nine promissory notes, marked as Exhibits A to I inclusive, each of which were uniformly worded in the following manner:

___________, after date, for value received, I/we, jointly and severaIly promise to pay to the ORDER of the REPUBLIC PLANTERS BANK, at its office in Manila, Philippines, the sum of ___________ PESOS(....) Philippine Currency...

On the right bottom margin of the promissory notes appeared the signatures of Shozo Yamaguchi and Fermin Canlas above their printed names with the phrase "and (in) his personal capacity" typewritten below. At the bottom of the promissory notes appeared: "Please credit proceeds of this note to:

________ Savings Account ______XX Current Account

No. 1372-00257-6

of WORLDWIDE GARMENT MFG. CORP.

These entries were separated from the text of the notes with a bold line which ran horizontally across the pages.

In the promissory notes marked as Exhibits C, D and F, the name Worldwide Garment Manufacturing, Inc. was apparently rubber stamped above the signatures of defendant and private respondent.

On December 20, 1982, Worldwide Garment Manufacturing, Inc. noted to change its corporate name to Pinch Manufacturing Corporation.

On February 5, 1982, petitioner bank filed a complaint for the recovery of sums of money covered among others, by the nine promissory notes with interest thereon, plus attorney's fees and penalty charges. The complainant was originally brought against Worldwide Garment Manufacturing, Inc. inter alia, but it was later amended to drop Worldwide Manufacturing, Inc. as defendant and substitute Pinch Manufacturing Corporation it its place. Defendants Pinch Manufacturing Corporation and Shozo Yamaguchi did not file an Amended Answer and failed to appear at the scheduled pre-trial conference despite due notice. Only private respondent Fermin Canlas filed an Amended Answer wherein he, denied having issued the promissory notes in question since according to him, he was not an officer of Pinch Manufacturing Corporation, but instead of Worldwide Garment Manufacturing, Inc., and that when he issued said promissory notes in behalf of Worldwide Garment Manufacturing, Inc., the same were in blank, the typewritten entries not appearing therein prior to the time he affixed his signature.

In the mind of this Court, the only issue material to the resolution of this appeal is whether private respondent Fermin Canlas is solidarily liable with the other defendants, namely Pinch Manufacturing Corporation and Shozo Yamaguchi, on the nine promissory notes.

We hold that private respondent Fermin Canlas is solidarily liable on each of the promissory notes bearing his signature for the following reasons:

The promissory motes are negotiable instruments and must be governed by the Negotiable Instruments Law. 2

31


Under the Negotiable lnstruments Law, persons who write their names on the face of promissory notes are makers and are liable as such. 3 By signing the notes, the maker promises to pay to the order of the payee or any holder 4according to the tenor thereof. 5 Based on the above provisions of law, there is no denying that private respondent Fermin Canlas is one of the co-makers of the promissory notes. As such, he cannot escape liability arising therefrom.

Where an instrument containing the words "I promise to pay" is signed by two or more persons, they are deemed to be jointly and severally liable thereon. 6 An instrument which begins" with "I" ,We" , or "Either of us" promise to, pay, when signed by two or more persons, makes them solidarily liable. 7 The fact that the singular pronoun is used indicates that the promise is individual as to each other; meaning that each of the co-signers is deemed to have made an independent singular promise to pay the notes in full.

In the case at bar, the solidary liability of private respondent Fermin Canlas is made clearer and certain, without reason for ambiguity, by the presence of the phrase "joint and several" as describing the unconditional promise to pay to the order of Republic Planters Bank. A joint and several note is one in which the makers bind themselves both jointly and individually to the payee so that all may be sued together for its enforcement, or the creditor may select one or more as the object of the suit. 8 A joint and several obligation in common law corresponds to a civil law solidary obligation; that is, one of several debtors bound in such wise that each is liable for the entire amount, and not merely for his proportionate share. 9 By making a joint and several promise to pay to the order of Republic Planters Bank, private respondent Fermin Canlas assumed the solidary liability of a debtor and the payee may choose to enforce the notes against him alone or jointly with Yamaguchi and Pinch Manufacturing Corporation as solidary debtors.

As to whether the interpolation of the phrase "and (in) his personal capacity" below the signatures of the makers in the notes will affect the liability of the makers, We do not find it necessary to resolve and decide, because it is immaterial and will not affect to the liability of private respondent Fermin Canlas as a joint and several debtor of the notes. With or without the presence of said phrase, private respondent Fermin Canlas is primarily liable as a co-maker of each of the notes and his liability is that of a solidary debtor.

Finally, the respondent Court made a grave error in holding that an amendment in a corporation's Articles of Incorporation effecting a change of corporate name, in this

case from Worldwide Garment manufacturing Inc to Pinch Manufacturing Corporation extinguished the personality of the original corporation.

The corporation, upon such change in its name, is in no sense a new corporation, nor the successor of the original corporation. It is the same corporation with a different name, and its character is in no respect changed. 10

A change in the corporate name does not make a new corporation, and whether effected by special act or under a general law, has no affect on the identity of the corporation, or on its property, rights, or liabilities. 11

The corporation continues, as before, responsible in its new name for all debts or other liabilities which it had previously contracted or incurred. 12

As a general rule, officers or directors under the old corporate name bear no personal liability for acts done or contracts entered into by officers of the corporation, if duly authorized. Inasmuch as such officers acted in their capacity as agent of the old corporation and the change of name meant only the continuation of the old juridical entity, the corporation bearing the same name is still bound by the acts of its agents if authorized by the Board. Under the Negotiable Instruments Law, the liability of a person signing as an agent is specifically provided for as follows:

Sec. 20. Liability of a person signing as agent and so forth. Where the instrument contains or a person adds to his signature words indicating that he signs for or on behalf of a principal , or in a representative capacity, he is not liable on the instrument if he was duly authorized; but the mere addition of words describing him as an agent, or as filling a representative character, without disclosing his principal, does not exempt him from personal liability.

Where the agent signs his name but nowhere in the instrument has he disclosed the fact that he is acting in a representative capacity or the name of the third party for whom he might have acted as agent, the agent is personally liable to take holder of the instrument and cannot be permitted to prove that he was merely acting as agent of another and parol or extrinsic evidence is not admissible to avoid the agent's personal liability. 13

On the private respondent's contention that the promissory notes were delivered to him in blank for his signature, we rule otherwise. A careful examination of the notes

32


in question shows that they are the stereotype printed form of promissory notes generally used by commercial banking institutions to be signed by their clients in obtaining loans. Such printed notes are incomplete because there are blank spaces to be filled up on material particulars such as payee's name, amount of the loan, rate of interest, date of issue and the maturity date. The terms and conditions of the loan are printed on the note for the borrower-debtor 's perusal. An incomplete instrument which has been delivered to the borrower for his signature is governed by Section 14 of the Negotiable Instruments Law which provides, in so far as relevant to this case, thus:

Sec. 14. Blanks: when may be filled. — Where the instrument is wanting in any material particular, the person in possesion thereof has a prima facie authority to complete it by filling up the blanks therein. ... In order, however, that any such instrument when completed may be enforced against any person who became a party thereto prior to its completion, it must be filled up strictly in accordance with the authority given and within a reasonable time...

Proof that the notes were signed in blank was only the self-serving testimony of private respondent Fermin Canlas, as determined by the trial court, so that the trial court ''doubts the defendant (Canlas) signed in blank the promissory notes". We chose to believe the bank's testimony that the notes were filled up before they were given to private respondent Fermin Canlas and defendant Shozo Yamaguchi for their signatures as joint and several promissors. For signing the notes above their typewritten names, they bound themselves as unconditional makers. We take judicial notice of the customary procedure of commercial banks of requiring their clientele to sign promissory notes prepared by the banks in printed form with blank spaces already filled up as per agreed terms of the loan, leaving the borrowers-debtors to do nothing but read the terms and conditions therein printed and to sign as makers or co-makers. When the notes were given to private respondent Fermin Canlas for his signature, the notes were complete in the sense that the spaces for the material particular had been filled up by the bank as per agreement. The notes were not incomplete instruments; neither were they given to private respondent Fermin Canlas in blank as he claims. Thus, Section 14 of the NegotiabIe Instruments Law is not applicable.

The ruling in case of Reformina vs. Tomol relied upon by the appellate court in reducing the interest rate on the promissory notes from 16% to 12% per annum does not squarely apply to the instant petition. In the abovecited case, the rate of

12% was applied to forebearances of money, goods or credit and court judgemets thereon, only in the absence of any stipulation between the parties.

In the case at bar however , it was found by the trial court that the rate of interest is 9% per annum, which interest rate the plaintiff may at any time without notice, raise within the limits allowed law. And so, as of February 16, 1984 , the plaintiff had fixed the interest at 16% per annum.

This Court has held that the rates under the Usury Law, as amended by Presidential Decree No. 116, are applicable only to interests by way of compensation for the use or forebearance of money. Article 2209 of the Civil Code, on the other hand, governs interests by way of damages. 15 This fine distinction was not taken into consideration by the appellate court, which instead made a general statement that the interest rate be at 12% per annum.

Inasmuch as this Court had declared that increases in interest rates are not subject to any ceiling prescribed by the Usury Law, the appellate court erred in limiting the interest rates at 12% per annum. Central Bank Circular No. 905, Series of 1982 removed the Usury Law ceiling on interest rates. 16

In the 1ight of the foregoing analysis and under the plain language of the statute and jurisprudence on the matter, the decision of the respondent: Court of Appeals absolving private respondent Fermin Canlas is REVERSED and SET ASIDE. Judgement is hereby rendered declaring private respondent Fermin Canlas jointly and severally liable on all the nine promissory notes with the following sums and at 16% interest per annum from the dates indicated, to wit:

Under the promissory note marked as exhibit A, the sum of P300,000.00 with interest from January 29, 1981 until fully paid; under promissory note marked as Exhibit B, the sum of P40,000.00 with interest from November 27, 1980: under the promissory note denominated as Exhibit C, the amount of P166,466.00 with interest from January 29, 1981; under the promissory note denominated as Exhibit D, the amount of P367,000.00 with interest from January 29, 1981 until fully paid; under the promissory note marked as Exhibit E, the amount of P86,130.31 with interest from January 29, 1981; under the promissory note marked as Exhibit F, the sum of P140,000.00 with interest from November 27, 1980 until fully paid; under the promissory note marked as Exhibit G, the amount of P12,703.70 with interest from November 27, 1980; the promissory note marked as Exhibit H, the sum of P281,875.91 with interest from January 29, 1981; and the promissory note marked as Exhibit I, the sum of P200,000.00 with interest on January 29, 1981.

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The liabilities of defendants Pinch Manufacturing Corporation (formerly Worldwide Garment Manufacturing, Inc.) and Shozo Yamaguchi, for not having appealed from the decision of the trial court, shall be adjudged in accordance with the judgment rendered by the Court a quo.

With respect to attorney's fees, and penalty and service charges, the private respondent Fermin Canlas is hereby held jointly and solidarity liable with defendants for the amounts found, by the Court a quo. With costs against private respondent.

SO ORDERED.

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