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

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

Marcial Esposo for plaintiff-appellant.

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

DIZON, J p:
An appeal from a decision of the Court of First Instance of Manila dismissing the complaint
filed by the Philippine Education Co., Inc. against Mauricio A. Soriano, Enrico Palomar and
Rafael Contreras.
On April 18, 1958 Enrique Montinola sought to purchase from the Manila Post Office ten (10)
money orders of P200.00 each payable to E. P. Montinola with address at Lucena, Quezon.
After the postal teller had made out money orders numbered 124685, 124687-124695,
Montinola offered to pay for them with a private check. As private checks were not generally
accepted in payment of money orders, the teller advised him to see the Chief of the Money
Order Division, but instead of doing so, Montinola managed to leave the building with his
own check and the ten (10) money orders without the knowledge of the teller.

SYLLABUS
1.COMMERCIAL LAW; POSTAL LAW; NATURE OF POSTAL MONEY ORDERS. It is not disputed
that our postal statutes were patterned after similar statutes in force in the United States.
For this reason, ours are generally construed in accordance with the construction given in
the United States to their own postal statutes, in the absence of any special reason justifying
a departure from this policy or practice. The weight of authority in the United States is that
postal money orders are not negotiable instruments (Bolognesi vs. U.S., 189 Fed. 395;
U.S. vs. Stock Drawers National Bank, 30 Fed. 912), the reason behind this rule being that, in
establishing and operating a postal money order system, the government is not engaging in
commercial transactions but merely exercises a governmental power for the public benefit.
It is to be noted in this connection that some of the restrictions imposed upon money orders
by postal laws and regulations are inconsistent with the character of negotiable instruments.
For instance, such laws and regulations usually provide for not more than one endorsement;
payment of money orders may be withheld under a variety of circumstances (49 C. J. 1153).
2.ADMINISTRATIVE LAW; ID.; A LETTER OF THE DIRECTOR OF POSTS SETTING CONDITIONS
FOR THE REDEMPTION BY A BANK OF POSTAL MONEY ORDERS RECEIVED BY IT FROM ITS
DEPOSITORS IS NOT COVERED BY SEC. 79 (B) OF THE REVISED ADMINISTRATIVE CODE, BUT
BY SEC. 1190 OF THE SAME CODE. Of particular application to the postal money order in
question are the conditions laid down in the letter of the Director of Posts of October 26,
1948 (Exhibit 3) to the Bank of America for the redemption of postal money orders received
by it from its depositors. Among others, the condition is imposed that "in cases adverse
claim, the money order or money orders involved will be returned to you (the bank) and the
corresponding amount will have to be refunded to the Postmaster, Manila, who reserves the
right to deduct the value thereof from any amount due you if such step is deemed
necessary." . . .Moreover, not being a party to the understanding existing between the postal
officers, on the one hand, and the Bank of America, on the other, appellant has no right to
assail the terms and conditions thereof on the ground that the letter setting forth the terms
and conditions aforesaid is void because it was not issued by a Department Head in
accordance with Sec. 79 (B) of the Revised Administrative Code. In reality, however, said
legal provision does not apply to the letter in question because it does not provide for a
department regulation but merely sets down certain conditions upon the privilege granted to
the Bank of America to accept and pay postal money orders presented its depositors,
instead of the same being presented for payment at the Manila Post Office. Such being the
case, it is clear that the Director of Posts had ample authority to issue it pursuant to Sec.
1190 of the Revised Administrative Code.

DECISION

On the same date, April 18, 1958, upon discovery of the disappearance of the unpaid money
orders, an urgent message was sent to all postmasters, and the following day notice was
likewise served upon all banks. instructing them not to pay anyone of the money orders
aforesaid if presented for payment. The Blank of America received a copy of said notice
three days later.
On April 23, 1958 one of the above mentioned money orders numbered 124688 was
received by appellant as part of its sales receipts. The following day it deposited the same
with the Bank of America, and one day thereafter the latter cleared it with the Bureau of
Posts and received from the latter its face value of P200.00.
On September 27, 1961, appellee Mauricio A. Soriano, Chief of the Money Order Division of
the Manila Post Office, acting for and in behalf of his co-appellee, Post-master Enrico
Palomar, notified the Bank of America that money order No. 124688 attached to his letter
had been found to have been irregularly issued and that, in view thereof, the amount it
represented had been deducted from the bank's clearing account. For its part, on August 2
of the same year, the Bank of America debited appellant's account with the same amount
and gave it advice thereof by means of a debit memo.
On October 12, 1961 appellant requested the Postmaster General to reconsider the action
taken by his office deducting the sum of P200.00 from the clearing account of the Bank of
America, but his request was denied. So was appellant's subsequent request that the matter
be referred to the Secretary of Justice for advice. Thereafter, appellant elevated the matter
to the Secretary of Public Works and Communications, but the latter sustained the actions
taken by the postal officers.
In connection with the events set forth above, Montinola was charged with theft in the Court
of First Instance of Manila (Criminal Case No. 43866) but after trial he was acquitted on the
ground of reasonable doubt.
On January 8, 1962 appellant filed an action against appellees in the Municipal Court of
Manila praying for judgment as follows:
"WHEREFORE, plaintiff prays that after hearing defendants be ordered:
(a)To countermand the notice given to the Bank of America on
September 27, 1961, deducting from the said Bank's clearing account
the sum of P200.00 represented by postal money order No. 124688, or

in the alternative indemnify the plaintiff in the same amount with

interest at 8-1/2% per annum from September 27, 1961, which is the
rate of interest being paid by plaintiff on its overdraft account;
(b)To pay to the plaintiff out of their own personal funds, jointly and
severally, actual and moral damages in the amount of P1,000.00 or in
such amount as will be proved and/or determined by this Honorable
Court: exemplary damages in the amount of P1,000.00, attorney's fees
of P1,000.00, and the costs of action.
Plaintiff also prays for such other and further relief as may be deemed
just and equitable."
On November 17, 1962, after the parties had submitted the stipulation of facts reproduced
at pages 12 to 15 of the Record on Appeal, the above-named court rendered judgment as
follows:
"WHEREFORE, judgment is hereby rendered, ordering the defendants to
countermand the notice given to the Bank of America on September 27,
1961, deducting from said Bank's clearing account the sum of P200.00
representing the amount of postal money order No. 124688, or in the
alternative, to indemnify the plaintiff in the said sum of P200.00 with
interest thereon at the rate of 8-1/2% per annum from September 27,
1961 until fully paid; without any pronouncement as to costs and
attorney's fees."
The case was appealed to the Court of First Instance of Manila where, after the parties had
resubmitted the same stipulation of facts, the appealed decision dismissing the complaints
with costs, was rendered.
The first, second and fifth assignments of error discussed in appellant's brief are related to
each other and will therefore be discussed jointly. They raise this main issue: that the postal
money order in question is a negotiable instrument; that its nature as such is not in anyway
affected by the letter dated October 26, 1948 signed by the Director of Posts and addressed
to all banks with a clearing account with the Post Office, and that, money orders, once
issued, create a contractual relationship of debtor and creditor, respectively, between the
government, on the one hand, and the remitters payees or endorsees, on the other.
It is not disputed that our postal statutes were patterned after similar statutes in force in the
United States. For this reason, ours are generally construed in accordance with the
construction given in the United States to their own postal statutes, in the absence of any
special reason justifying a departure from this policy or practice. The weight of authority in
the United Status is that postal money orders are not negotiable instruments (Bolognesi vs.
U. S., 189 Fed. 395; U. S. vs. Stock Drawers National Bank, 30 Fed. 912), the reason behind
this rule being that, in establishing and operating a postal money order system, the
government is not engaging in commercial transactions but merely exercises a
governmental power for the public benefit.
It is to be noted in this connection that some of the restrictions imposed upon money orders
by postal laws and regulations are inconsistent with the character of negotiable instruments.
For instance, such laws and regulations usually provide for not more than one endorsement;
payment of money orders may be withheld under a variety of circumstances (49 C. J. 1153).

Of particular application to the postal money order in question are the conditions laid down
in the letter of the Director of Posts of October 26, 1948 (Exhibit 3) to the Bank of America
for the redemption of postal money orders received by it from its depositors. Among others,
the condition is imposed that "in cases of adverse claim, the money order or money orders
involved will be returned to you (the bank) and the corresponding amount will have to be
refunded to the Postmaster, Manila, who reserves the right to deduct the value thereof from
any amount due you if such step is deemed necessary." The conditions thus imposed in
order to enable the bank to continue enjoying the facilities theretofore enjoyed by its
depositors, were accepted by the Bank of America. The latter is therefore bound by them.
That it is so is clearly suffered from the fact that, upon receiving advice that the amount
represented by the money order in question had been deducted from its clearing account
with the Manila Post Office, it did not file any protest against such action.

Moreover, not being a party to the understanding existing between the postal officers, on
the one hand, and the Bank of America, on the other, appellant has no right to assail the
terms and conditions thereof on the ground that the letter setting forth the terms and
conditions aforesaid is void because it was not issued by a Department Head in accordance
with Sec. 79(B) of the Revised Administrative Code. In reality, however, said legal provision
does not apply to the letter in question because it does not provide for a department
regulation but merely sets down certain conditions upon the privilege granted to the Bank of
America to accept and pay postal money orders presented by its depositors, instead of the
same being presented for payment at the Manila Post Office. Such being the case, it is clear
that the Director of Posts had ample authority to issue it pursuant to Sec. 1190 of the
Revised Administrative Code.
In view of the foregoing, We do not find it necessary to resolve the issues raised in the third
and fourth assignments of error.
WHEREFORE, the appealed decision being in accordance with law, the same is hereby
affirmed with costs.

[G.R. No. 97753. August 10, 1992.]

CALTEX (PHILIPPINES), INC., petitioner, vs. COURT OF
APPEALS and SECURITY BANK AND TRUST
COMPANY, respondents.
Bito, Lozada, Ortega & Castillo for petitioners.
Nepomuceno, Hofilea & Guingona for private.
DECISION
REGALADO, J p:
This petition for review on certiorari impugns and seeks the reversal of the decision
promulgated by respondent court on March 8, 1991 in CA-G.R. CV No. 23615 1 affirming,
with modifications, the earlier decision of the Regional Trial Court of Manila, Branch
XLII, 2 which dismissed the complaint filed therein by herein petitioner against private
respondent bank.
The undisputed background of this case, as found by the court a quo and adopted by
respondent court, appears of record:
"1.On various dates, defendant, a commercial banking institution,
through its Sucat Branch issued 280 certificates of time deposit (CTDs)
in favor of one Angel dela Cruz who deposited with herein defendant the
aggregate amount of P1,120,000.00, as follows: (Joint Partial Stipulation
of Facts and Statement of Issues, Original Records, p. 207; Defendant's
Exhibits 1 to 280):
CTDCTD
DatesSerial Nos.QuantityAmount
22 Feb. 8290101 to 9012020P80,000
26 Feb. 8274602 to 7469190360,000
2 Mar. 8274701 to 7474040160,000
4 Mar. 8290127 to 901462080,000
5 Mar. 8274797 to 94800416,000
5 Mar. 8289965 to 899862288,000
5 Mar. 8270147 to 90150416,000
8 Mar. 8290001 to 900202080,000
9 Mar. 8290023 to 9005028112,000
9 Mar. 8289991 to 900001040,000
9 Mar. 8290251 to 902722288,000

Total280P1,120,000
==========
"2.Angel dela Cruz delivered the said certificates of time deposit (CTDs)
to herein plaintiff in connection with his purchase of fuel products from
the latter (Original Record, p. 208).
"3.Sometime in March 1982, Angel dela Cruz informed Mr. Timoteo
Tiangco, the Sucat Branch Manager, that he lost all the certificates of
time deposit in dispute. Mr. Tiangco advised said depositor to execute
and submit a notarized Affidavit of Loss, as required by defendant
bank's procedure, if he desired replacement of said lost CTDs (TSN,
February 9, 1987. pp. 48-50). LexLib
"4.On March 18, 1982, Angel dela Cruz executed and delivered to
defendant bank the required Affidavit of Loss (Defendant's Exhibit 281).
On the basis of said affidavit of loss, 280 replacement CTDs were issued
in favor of said depositor (Defendant's Exhibits 282-561).

"5.On March 25, 1982, Angel dela Cruz negotiated and obtained a loan
from defendant bank in the amount of Eight Hundred Seventy Five
Thousand Pesos (P875,000.00). On the same date, said depositor
executed a notarized Deed of Assignment of Time Deposit (Exhibit 562)
which stated, among others, that he (dela Cruz) surrenders to defendant
bank `full control of the indicated time deposits from and after date of
the assignment and further authorizes said bank to pre-terminate, setoff and 'apply the said time deposits to the payment of whatever
amount or amounts may be due' on the loan upon its maturity (TSN,
February 9, 1987, pp. 60-62).
"6.Sometime in November, 1982, Mr. Aranas, Credit Manager of plaintiff
Caltex (Phils.) Inc. went to the defendant bank's Sucat branch and
presented for verification the CTDs declared lost by Angel dela Cruz
alleging that the same were delivered to herein plaintiff `as security for
purchases made with Caltex Philippines, Inc.' by said depositor (TSN,
February 9, 1987, pp. 54-68).
"7.On November 26, 1982, defendant received a letter (Defendant's
Exhibit 563) from herein plaintiff formally informing it of its possession of
the CTDs in question and of its decision to preterminate the same.
"8.On December 8, 1982, plaintiff was requested by herein defendant to
furnish the former 'a copy of the document evidencing the guarantee
agreement with Mr. Angel dela Cruz' as well as 'the details of Mr. Angel
dela Cruz' obligations against which' plaintiff proposed to apply the time
deposits (Defendant's Exhibit 564).
"9.No copy of the requested documents was furnished herein defendant.
"10.Accordingly, defendant bank rejected the plaintiff's demand and
claim for payment of the value of the CTDs in a letter dated February 7,
1983 (Defendant's Exhibit 566).
"11.In April 1983, the loan of Angel dela Cruz with the defendant bank
matured and fell due and on August 5, 1983, the latter set-off and
applied the time deposits in question to the payment of the matured
loan (TSN, February 9, 1987, pp. 130-131).
"12.In view of the foregoing, plaintiff filed the instant complaint, praying
that defendant bank be ordered to pay it the aggregate value of the
certificates of time deposit of P1,120,000.00 plus accrued interest and
compounded interest therein at 16% per annum, moral and exemplary
damages as well as attorney's fees.
"After trial, the court a quo rendered its decision dismissing the instant
complaint." 3
On appeal, as earlier stated, respondent court affirmed the lower court's dismissal of the
complaint, hence this petition wherein petitioner faults respondent court in ruling (1) that
the subject certificates of deposit are non-negotiable despite being clearly negotiable
instruments; (2) that petitioner did not become a holder in due course of the said certificates

of deposit; and (3) in disregarding the pertinent provisions of the Code of Commerce relating
to lost instruments payable to bearer. 4
The instant petition is bereft of merit. cdrep
A sample text of the certificates of time deposit is reproduced below to provide a better
understanding of the issues involved in this recourse.
"SECURITY BANK
AND TRUST COMPANYNo. 90101
6778 Ayala Ave., Makati
Metro Manila, Philippines
SUCAT OFFICEP 4.000.00
CERTIFICATE OF DEPOSIT
Rate 16%
Date of MaturityFEB 23, 1984FEB 22 1982,19___
This is to Certify that BEARER has deposited in this Bank the sum of
PESOS: FOUR SECURITY BANK THOUSAND ONLY. SUCAT OFFICE P4,000 &
00 CTS Pesos, Philippine Currency, repayable to said depositor 731 days
after date, upon presentation and surrender of this certificate, with
interest at the rate of 16% per cent per annum.
(Sgd. Illegible(Sgd. Illegible)
_____________________________________________
AUTHORIZED SIGNATURES" 5
______________
Respondent court ruled that the CTDs in question are non-negotiable instruments,
rationalizing as follows:
" . . . While it may be true that the word `bearer' appears rather boldly
in the CTDs issued, it is important to note that after the word `BEARER'
stamped on the space provided supposedly for the name of the
depositor, the words `has deposited' a certain amount follows. The
document further provides that the amount deposited shall be
`repayable to said depositor' on the period indicated. Therefore, the text
of the instrument(s) themselves manifest with clarity that they are
payable, not to whoever purports to be the `bearer' but only to the
specified person indicated therein, the depositor. In effect, the appellee
bank acknowledges its depositor Angel dela Cruz as the person who
made the deposit and further engages itself to pay said depositor the
amount indicated thereon at the stipulated date." 6

We disagree with these findings and conclusions, and hereby hold that the CTDs in question
are negotiable instruments. Section 1 of Act No. 2031, otherwise known as the Negotiable
Instruments Law, enumerates the requisites for an instrument to become negotiable, viz:
"(a)It must be in writing and signed by the maker or drawer;
(b)Must contain an unconditional promise or order to pay a sum certain
in money;
(c)Must be payable on demand, or at a fixed or determinable future
time;
(d)Must be payable to order or to bearer; and
(e)Where the instrument is addressed to a drawee, he must be named
or otherwise indicated therein with reasonable certainty."
The CTDs in question undoubtedly meet the requirements of the law for negotiability. The
parties' bone of contention is with regard to requisite (d) set forth above. It is noted that Mr.

Timoteo P. Tiangco, Security Bank's Branch Manager way back in 1982, testified in open
court that the depositor referred to in the CTDs is no other than Mr. Angel de la Cruz. Cdpr
xxx xxx xxx
"Atty. Calida:
qIn other words Mr. Witness, you are saying that per books of the bank,
the depositor referred (sic) in these certificates states that it
was Angel dela Cruz? witness:
aYes, your Honor, and we have the record to show that Angel dela Cruz
was the one who cause (sic) the amount.
Atty. Calida:
qAnd no other person or entity or company, Mr. Witness?
witness:
aNone, your Honor." 7
xxx xxx xxx
"Atty. Calida:
qMr. Witness, who is the depositor identified in all of these certificates of
time deposit insofar as the bank is concerned?
witness:
aAngel dela Cruz is the depositor." 8
xxx xxx xxx
On this score, the accepted rule is that the negotiability or non-negotiability of an instrument
is determined from the writing, that is, from the face of the instrument itself. 9 In the
construction of a bill or note, the intention of the parties is to control, if it can be legally
ascertained. 10 While the writing may be read in the light of surrounding circumstances in
order to more perfectly understand the intent 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. 11
Contrary to what respondent court held, the CTDs are negotiable instruments. The
documents provide that the amounts deposited shall be repayable to the depositor. And
who, according to the document, is the depositor? It is the "bearer." The documents do not
say that the depositor is Angel de la Cruz and that the amounts deposited are repayable
specifically to him. Rather, the amounts are to be repayable to the bearer of the documents
or, for that matter, whosoever may be the bearer at the time of presentment.
If it was really the intention of respondent bank to pay the amount to Angel de la Cruz only,
it could have with facility so expressed that fact in clear and categorical terms in the
documents, instead of having the word "BEARER" stamped on the space provided for the
name of the depositor in each CTD. On the wordings of the documents, therefore, the
amounts deposited are repayable to whoever may be the bearer thereof. Thus, petitioner's
aforesaid witness merely declared that Angel de la Cruz is the depositor "insofar as the bank
is concerned," but obviously other parties not privy to the transaction between them would
not be in a position to know that the depositor is not the bearer stated in the CTDs. Hence,
the situation would require any party dealing with the CTDs to go behind the plain import of
what is written thereon to unravel the agreement of the parties thereto through
facts aliunde. This need for resort to extrinsic evidence is what is sought to be avoided by
the Negotiable Instruments Law and calls for the application of the elementary rule that the
interpretation of obscure words or stipulations in a contract shall not favor the party who
caused the obscurity. 12

The next query is whether petitioner can rightfully recover on the CTDs. This time, the
answer is in the negative. The records reveal that Angel de la Cruz, whom petitioner chose
not to implead in this suit for reasons of its own, delivered the CTDs amounting to
P1,120,000.00 to petitioner without informing respondent bank thereof at any time.
Unfortunately for petitioner, although the CTDs are bearer instruments, a valid negotiation
thereof for the true purpose and agreement between it and De la Cruz, as ultimately
ascertained, requires both delivery and indorsement. For, although petitioner seeks to
deflect this fact, the CTDs were in reality delivered to it as a security for De la Cruz'
purchases of its fuel products. Any doubt as to whether the CTDs were delivered as payment
for the fuel products or as a security has been dissipated and resolved in favor of the latter
by petitioner's own authorized and responsible representative himself. LexLib
In a letter dated November 26, 1982 addressed to respondent Security Bank, J. Q. Aranas, Jr.,
Caltex Credit Manager, wrote: " . . . These certificates of deposit were negotiated to us by
Mr. Angel dela Cruz to guarantee his purchases of fuel products" (Underscoring
ours.) 13 This admission is conclusive upon petitioner, its protestations notwithstanding.
Under the doctrine of estoppel, an admission or representation is rendered conclusive upon
the person making it, and cannot be denied or disproved as against the person relying
thereon. 14 A party may not go back on his own acts and representations to the prejudice of
the other party who relied upon them. 15 In the law of evidence, whenever a party has, by
his own declaration, act, or omission, intentionally and deliberately led another to believe a
particular thing true, and to act upon such belief, he cannot, in any litigation arising out of
such declaration, act, or omission, be permitted to falsify it. 16
If it were true that the CTDs were delivered as payment and not as security, petitioner's
credit manager could have easily said so, instead of using the words "to guarantee" in the
letter aforequoted. Besides, when respondent bank, as defendant in the court below, moved
for a bill of particulars therein 17 praying, among others, that petitioner, as plaintiff, be
required to aver with sufficient definiteness or particularity (a) the due date or dates
of payment of the alleged indebtedness of Angel de la Cruz to plaintiff and (b) whether or
not it issued a receipt showing that the CTDs were delivered to it by De la Cruz
as payment of the latter's alleged indebtedness to it, plaintiff corporation opposed the
motion. 18 Had it produced the receipt prayed for, it could have proved, if such truly was the
fact, that the CTDs were delivered as payment and not as security. Having opposed the
motion, petitioner now labors under the presumption that evidence willfully suppressed
would be adverse if produced. 19
Under the foregoing circumstances, this disquisition in Integrated Realty Corporation, et al.
vs. Philippine National Bank, et al. 20 is apropos:
" . . . Adverting again to the Court's pronouncements in Lopez, supra, we
quote therefrom:
'The character of the transaction between the parties
is to be determined by their intention, regardless of what
language was used or what the form of the transfer was. If it
was intended to secure the payment of money, it must be
construed as a pledge; but if there was some other intention, it
is not a pledge. However, even though a transfer, if regarded
by itself, appears to have been absolute, its object and
character might still be qualified and explained by
contemporaneous writing declaring it to have been a deposit of
the property as collateral security. It has been said that a
transfer of property by the debtor to a creditor, even if
sufficient on its face to make an absolute conveyance, should

be treated as a pledge if the debt continues in existence and is

not discharged by the transfer, and that accordingly the use of
the terms ordinarily importing conveyance of absolute
ownership will not be given that effect in such a transaction if
they are also commonly used in pledges and mortgages and
therefore do not unqualifiedly indicate a transfer of absolute
ownership, in the absence of clear and unambiguous language
or other circumstances excluding an intent to pledge.'"
Petitioner's insistence that the CTDs were negotiated to it begs the question. Under the
Negotiable Instruments Law, an instrument is negotiated when it is transferred from one
person to another in such a manner as to constitute the transferee the holder
thereof, 21 and a holder may be the payee or indorsee of a bill or note, who is in possession
of it, or the bearer thereof, 22 In the present case, however, there was no negotiation in the
sense of a transfer of the legal title to the CTDs in favor of petitioner in which situation, for
obvious reasons, mere delivery of the bearer CTDs would have sufficed. Here, the delivery
thereof only as security for the purchases of Angel de la Cruz (and we even disregard the
fact that the amount involved was not disclosed) could at the most constitute petitioner only
as a holder for value by reason of his lien. Accordingly, a negotiation for such purpose
cannot be effected by mere delivery of the instrument since, necessarily, the terms thereof
and the subsequent disposition of such security, in the event of non-payment of the principal
obligation, must be contractually provided for.

The pertinent law on this point is that where the holder has a lien on the instrument arising
from contract, he is deemed a holder for value to the extent of his lien. 23 As such holder of
collateral security, he would be a pledgee but the requirements therefor and the effects
thereof, not being provided for by the Negotiable Instruments Law, shall be governed by the
Civil Code provisions on pledge of incorporeal rights,24 which inceptively provide:
"Art. 2095.Incorporeal rights, evidenced by negotiable instruments, . . .
may also be pledged. The instrument proving the right pledged shall be
delivered to the creditor, and if negotiable, must be indorsed."
"Art. 2096.A pledge shall not take effect against third persons if a
description of the thing pledged and the date of the pledge do not
appear in a public instrument."
Aside from the fact that the CTDs were only delivered but not indorsed, the factual findings
of respondent court quoted at the start of this opinion show that petitioner failed to produce
any document evidencing any contract of pledge or guarantee agreement between it and
Angel de la Cruz. 25 Consequently, the mere delivery of the CTDs did not legally vest in
petitioner any right effective against and binding upon respondent bank. The requirement
under Article 2096 aforementioned is not a mere rule of adjective law prescribing the mode
whereby proof may be made of the date of a pledge contract, but a rule of substantive law
prescribing a condition without which the execution of a pledge contract cannot affect third
persons adversely. 26
On the other hand, the assignment of the CTDs made by Angel de la Cruz in favor of
respondent bank was embodied in a public instrument. 27 With regard to this other mode of
transfer, the Civil Code specifically declares:

"Art. 1625.An assignment of credit, right or action shall produce no

effect as against third persons, unless it appears in a public instrument,
or the instrument is recorded in the Registry of Property in case the
assignment involves real property."
Respondent bank duly complied with this statutory requirement. Contrarily, petitioner,
whether as purchaser, assignee or lienholder of the CTDs, neither proved the amount of its
credit or the extent of its lien nor the execution of any public instrument which could affect
or bind private respondent. Necessarily, therefore, as between petitioner and respondent
bank, the latter has definitely the better right over the CTDs in question. LibLex
Finally, petitioner faults respondent court for refusing to delve into the question of whether
or not private respondent observed the requirements of the law in the case of lost
negotiable instruments and the issuance of replacement certificates therefor, on the ground
that petitioner failed to raise that issue in the lower court. 28
On this matter, we uphold respondent court's finding that the aspect of alleged negligence
of private respondent was not included in the stipulation of the parties and in the statement
of issues submitted by them to the trial court. 29 The issues agreed upon by them for
resolution in this case are:
"1.Whether or not the CTDs as worded are negotiable instruments.
2.Whether or not defendant could legally apply the amount covered by
the CTDs against the depositor's loan by virtue of the assignment
(Annex 'C').
3.Whether or not there was legal compensation or set off involving the
amount covered by the CTDs and the depositor's outstanding account
with defendant, if any.
4.Whether or not plaintiff could compel defendant to preterminate the
CTDs before the maturity date provided therein.
5.Whether or not plaintiff is entitled to the proceeds of the CTDs.
6.Whether or not the parties can recover damages, attorney's fees and
litigation expenses from each other."
As respondent court correctly observed, with appropriate citation of some doctrinal
authorities, the foregoing enumeration does not include the issue of negligence on the part
of respondent bank. An issue raised for the first time on appeal and not raised timely in the
proceedings in the lower court is barred by estoppel. 30 Questions raised on appeal must be
within the issues framed by the parties and, consequently, issues not raised in the trial court
cannot be raised for the first time on appeal. 31
Pre-trial is primarily intended to make certain that all issues necessary to the disposition of a
case are properly raised. Thus, to obviate the element of surprise, parties are expected to
disclose at a pre-trial conference all issues of law and fact which they intend to raise at the
trial, except such as may involve privileged or impeaching matters. The determination of
issues at a pre-trial conference bars the consideration of other questions on appeal. 32

To accept petitioner's suggestion that respondent bank's supposed negligence may be

considered encompassed by the issues on its right to preterminate and receive the proceeds
of the CTDs would be tantamount to saying that petitioner could raise on appeal any issue.
We agree with private respondent that the broad ultimate issue of petitioner's entitlement to
the proceeds of the questioned certificates can be premised on a multitude of other legal
reasons and causes of action, of which respondent bank's supposed negligence is only one.
Hence, petitioner's submission, if accepted, would render a pre-trial delimitation of issues a
useless exercise. 33
Still, even assuming arguendo that said issue of negligence was raised in the court below,
petitioner still cannot have the odds in its favor. A close scrutiny of the provisions of the
Code of Commerce laying down the rules to be followed in case of lost instruments payable
to bearer, which it invokes, will reveal that said provisions, even assuming their applicability
to the CTDs in the case at bar, are merely permissive and not mandatory. The very first
article cited by petitioner speaks for itself:
"Art. 548.The dispossessed owner, no matter for what cause it may
be, may apply to the judge or court of competent jurisdiction, asking
that the principal, interest or dividends due or about to become due, be
not paid a third person, as well as in order to prevent the ownership of
the instrument that a duplicate be issued him." (Emphases ours.)
xxx xxx xxx
The use of the word "may" in said provision shows that it is not mandatory but discretionary
on the part of the "dispossessed owner" to apply to the judge or court of competent
jurisdiction for the issuance of a duplicate of the lost instrument. Where the provision reads
"may," this word shows that it is not mandatory but discretional. 34 The word "may" is
usually permissive, not mandatory. 35 It is an auxiliary verb indicating liberty, opportunity,
permission and possibility. 36
Moreover, as correctly analyzed by private respondent, 37 Articles 548 to 558 of the Code of
Commerce, on which petitioner seeks to anchor respondent bank's supposed negligence,
merely established, on the one hand, a right of recourse in favor of a dispossessed owner or
holder of a bearer instrument so that he may obtain a duplicate of the same, and, on the
other, an option in favor of the party liable thereon who, for some valid ground, may elect to
refuse to issue a replacement of the instrument, Significantly, none of the provisions cited by
petitioner categorically restricts or prohibits the issuance a duplicate or replacement
instrument sans compliance with the procedure outlined therein, and none establishes a
mandatory precedent requirement therefor. LLjur
WHEREFORE, on the modified premises above set forth, the petition is DENIED and the
appealed decision is hereby AFFIRMED.
SO ORDERED.

[G.R. No. 88866. February 18, 1991.]

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

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

Bengzon, Zarraga, Narciso, Cudala, Pecson & Bengson for Magno and Lucia Castillo.
Agapito S. Fajardo and Jaime M. Cabiles for respondent Golden Savings & Loan Association,
Inc.

P508,000.00, the second on July 13, 1979, in the amount of P310,000.00, and the third on
July 16, 1979, in the amount of P150,000.00. The total withdrawal was P968,000.00. 4
In turn, Golden Savings subsequently allowed Gomez to make withdrawals from his own
account, eventually collecting the total amount of P1,167,500.00 from the proceeds of the
apparently cleared warrants. The last withdrawal was made on July 16, 1979.
On July 21, 1979, Metrobank informed Golden Savings that 32 of the warrants had been
dishonored by the Bureau of Treasury on July 19, 1979, and demanded the refund by Golden
Savings of the amount it had previously withdrawn, to make up the deficit in its account.
The demand was rejected. Metrobank then sued Golden Savings in the Regional Trial Court
of Mindoro. 5 After trial, judgment was rendered in favor of Golden Savings, which, however,
filed a motion for reconsideration even as Metrobank filed its notice of appeal. On November
4, 1986, the lower court modified its decision thus:
ACCORDINGLY, judgment is hereby rendered:

DECISION

CRUZ, J p:
This case, for all its seeming complexity, turns on a simple question of negligence. The facts,
pruned of all non-essentials, are easily told.
The Metropolitan Bank and Trust Co. is a commercial bank with branches throughout the
Philippines and even abroad. Golden Savings and Loan Association was, at the time these
events happened, operating in Calapan, Mindoro, with the other private respondents as its
principal officers.
In January 1979, a certain Eduardo Gomez opened an account with Golden Savings and
deposited over a period of two months 38 treasury warrants with a total value of
P1,755,228.37. They were all drawn by the Philippine Fish Marketing Authority and
purportedly signed by its General Manager and counter-signed by its Auditor. Six of these
were directly payable to Gomez while the others appeared to have been indorsed by their
respective payees, followed by Gomez as second indorser. 1
On various dates between June 25 and July 16, 1979, all these warrants were subsequently
indorsed by Gloria Castillo as Cashier of Golden Savings and deposited to its Savings
Account No. 2498 in the Metrobank branch in Calapan, Mindoro. They were then sent for
clearing by the branch office to the principal office of Metrobank, which forwarded them to
the Bureau of Treasury for special clearing. 2
More than two weeks after the deposits, Gloria Castillo went to the Calapan branch several
times to ask whether the warrants had been cleared. She was told to wait. Accordingly,
Gomez was meanwhile not allowed to withdraw from his account. Later, however,
"exasperated" over Gloria's repeated inquiries and also as an accommodation for a "valued
client," the petitioner says it finally decided to allow Golden Savings to withdraw from the
proceeds of the warrants. 3 The first withdrawal was made on July 9, 1979, in the amount of

1.Dismissing the complaint with costs against the plaintiff;

2.Dissolving and lifting the writ of attachment of the properties of
defendant Golden Savings and Loan Association, Inc. and defendant
Spouses Magno Castillo and Lucia Castillo;
3.Directing the plaintiff to reverse its action of debiting Savings Account
No. 2498 of the sum of P1,754,089.00 and to reinstate and credit to
such account such amount existing before the debit was made including
the amount of P812,033.37 in favor of defendant Golden Savings and
Loan Association, Inc. and thereafter, to allow defendant Golden Savings
and Loan Association, Inc. to withdraw the amount outstanding thereon
before the debit;
4.Ordering the plaintiff to pay the defendant Golden Savings and Loan
Association, Inc. attorney's fees and expenses of litigation in the amount
of P200,000.00.
5.Ordering the plaintiff to pay the defendant Spouses Magno Castillo and
Lucia Castillo attorney's fees and expenses of litigation in the amount of
P100,000.00.
SO ORDERED.
On appeal to the respondent court, 6 the decision was affirmed, prompting Metrobank to file
this petition for review on the following grounds:
1.Respondent Court of Appeals erred in disregarding and failing to apply
the clear contractual terms and conditions on the deposit slips allowing
Metrobank to charge back any amount erroneously credited.
(a)Metrobank's right to charge back is not limited to instances where the
checks or treasury warrants are forged or unauthorized.

(b)Until such time as Metrobank is actually paid, its obligation is that of

a mere collecting agent which cannot be held liable for its failure to
collect on the warrants.
2.Under the lower court's decision, affirmed by respondent Court of
Appeals, Metrobank is made to pay for warrants already dishonored,
thereby perpetuating the fraud committed by Eduardo Gomez.
3.Respondent Court of Appeals erred in not finding that as between
Metrobank and Golden Savings, the latter should bear the loss.
4.Respondent Court of Appeals erred in holding that the treasury
warrants involved in this case are not negotiable instruments.
The petition has no merit.
From the above undisputed facts, it would appear to the Court that Metrobank was indeed
negligent in giving Golden Savings the impression that the treasury warrants had been
cleared and that, consequently, it was safe to allow Gomez to withdraw the proceeds thereof
from his account with it. Without such assurance, Golden Savings would not have allowed
the withdrawals; with such assurance, there was no reason not to allow the withdrawal.
Indeed, Golden Savings might even have incurred liability for its refusal to return the money
that to all appearances belonged to the depositor, who could therefore withdraw it any time
and for any reason he saw fit.
It was, in fact, to secure the clearance of the treasury warrants that Golden Savings
deposited them to its account with Metrobank. Golden Savings had no clearing facilities of
its own. It relied on Metrobank to determine the validity of the warrants through its own
services. The proceeds of the warrants were withheld from Gomez until Metrobank allowed
Golden Savings itself to withdraw them from its own deposit. 7 It was only when Metrobank
gave the go-signal that Gomez was finally allowed by Golden Savings to withdraw them from
his own account.
The argument of Metrobank that Golden Savings should have exercised more care in
checking the personal circumstances of Gomez before accepting his deposit does not hold
water. It was Gomez who was entrusting the warrants, not Golden Savings that was
extending him a loan; and moreover, the treasury warrants were subject to clearing, pending
which the depositor could not withdraw its proceeds. There was no question of Gomez's
identity or of the genuineness of his signature as checked by Golden Savings. In fact, the
treasury warrants were dishonored allegedly because of the forgery of the signatures of the
drawers, not of Gomez as payee or indorser. Under the circumstances, it is clear that Golden
Savings acted with due care and diligence and cannot be faulted for the withdrawals it
allowed Gomez to make.
By contrast, Metrobank exhibited extraordinary carelessness. The amount involved was not
trifling more than one and a half million pesos (and this was 1979). There was no reason
why it should not have waited until the treasury warrants had been cleared; it would not
have lost a single centavo by waiting. Yet, despite the lack of such clearance and
notwithstanding that it had not received a single centavo from the proceeds of the treasury
warrants, as it now repeatedly stresses it allowed Golden Savings to withdraw not once,
not twice, but thrice from the uncleared treasury warrants in the total amount of
P968,000.00. LexLib

Its reason? It was "exasperated" over the persistent inquiries of Gloria Castillo about the
clearance and it also wanted to "accommodate" a valued client. It "presumed" that the
warrants had been cleared simply because of "the lapse of one week." 8 For a bank with its
long experience, this explanation is unbelievably naive. llcd
And now, to gloss over its carelessness, Metrobank would invoke the conditions printed on
the dorsal side of the deposit slips through which the treasury warrants were deposited by
Golden Savings with its Calapan branch. The conditions read as follows:
Kindly note that in receiving items on deposit, the bank obligates itself
only as the depositor's collecting agent, assuming no responsibility
beyond care in selecting correspondents, and until such time as actual
payment shall have come into possession of this bank, the right is
reserved to charge back to the depositor's account any amount
previously credited, whether or not such item is returned. This also
applies to checks drawn on local banks and bankers and their branches
as well as on this bank, which are unpaid due to insufficiency of funds,
forgery, unauthorized overdraft or any other reason. (Emphasis
supplied.)
According to Metrobank, the said conditions clearly show that it was acting only as a
collecting agent for Golden Savings and give it the right to "charge back to the depositor's
account any amount previously credited, whether or not such item is returned. This also
applies to checks ".. which are unpaid due to insufficiency of funds, forgery, unauthorized
overdraft of any other reason." It is claimed that the said conditions are in the nature of
contractual stipulations and became binding on Golden Savings when Gloria Castillo, as its
Cashier, signed the deposit slips. LLpr

Doubt may be expressed about the binding force of the conditions, considering that they
have apparently been imposed by the bank unilaterally, without the consent of the
depositor. Indeed, it could be argued that the depositor, in signing the deposit slip, does so
only to identify himself and not to agree to the conditions set forth in the given permit at the
back of the deposit slip. We do not have to rule on this matter at this time. At any rate, the
Court feels that even if the deposit slip were considered a contract, the petitioner could still
not validly disclaim responsibility thereunder in the light of the circumstances of this
case. prcd
In stressing that it was acting only as a collecting agent for Golden Savings, Metrobank
seems to be suggesting that as a mere agent it cannot be liable to the principal. This is not
exactly true. On the contrary, Article 1909 of the Civil Code clearly provides that
Art. 1909. The agent is responsible not only for fraud, but also for
negligence, which shall be judged with more or less rigor by the courts,
according to whether the agency was or was not for a compensation.
The negligence of Metrobank has been sufficiently established. To repeat for emphasis, it
was the clearance given by it that assured Golden Savings it was already safe to allow
Gomez to withdraw the proceeds of the treasury warrants he had deposited.
Metrobank misled Golden Savings. There may have been no express clearance, as
Metrobank insists (although this is refuted by Golden Savings) but in any case that clearance
could be implied from its allowing Golden Savings to withdraw from its account not only once

or even twice but three times. The total withdrawal was in excess of its original balance
before the treasury warrants were deposited, which only added to its belief that the treasury
warrants had indeed been cleared.

SEC. 3.When promise is unconditional. An unqualified order or

promise to pay is unconditional within the meaning of this Act though
coupled with

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

(a)An indication of a particular fund out of which reimbursement is to be

made or a particular account to be debited with the amount; or

The belated notification aggravated the petitioner's earlier negligence in giving express or at
least implied clearance to the treasury warrants and allowing payments therefrom to Golden
Savings. But that is not all. On top of this, the supposed reason for the dishonor, to wit, the
forgery of the signatures of the general manager and the auditor of the drawer corporation,
has not been established. 9 This was the finding of the lower courts which we see no reason
to disturb. And as we said in MWSS v. Court of Appeals: 10
Forgery cannot be presumed (Siasat, et al. v. IAC, et al., 139 SCRA 238). It must be
established by clear, positive and convincing evidence. This was not done in the present
case.
A no less important consideration is the circumstance that the treasury warrants in question
are not negotiable instruments. Clearly stamped on their face is the word "non-negotiable."
Moreover, and this is of equal significance, it is indicated that they are payable from a
particular fund, to wit, Fund 501.
The following sections of the Negotiable Instruments Law, especially the underscored parts,
are pertinent:
SECTION 1. Form of negotiable instruments. An instrument to be
negotiable must conform to the following requirements:

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

But an order or promise to pay out of a particular fund is not
unconditional.
The indication of Fund 501 as the source of the payment to be made on the treasury
warrants makes the order or promise to pay "not unconditional" and the warrants
themselves non-negotiable. There should be no question that the exception on Section 3 of
the Negotiable Instruments Law is applicable in the case at bar. This conclusion conforms
to Abubakar vs. Auditor General 11 where the Court held:
The petitioner argues that he is a holder in good faith and for value of a
negotiable instrument and is entitled to the rights and privileges of a
holder in due course, free from defenses. But this treasury warrant is not
within the scope of the negotiable instrument law. For one thing, the
document bearing on its face the words "payable from the appropriation
for food administration, is actually an Order for payment out of "a
particular fund," and is not unconditional and does not fulfill one of the
essential requirements of a negotiable instrument (Sec. 3 last sentence
and section [1(b)] of the Negotiable Instruments Law).
Metrobank cannot contend that by indorsing the warrants in general, Golden Savings
assumed that they were "genuine and in all respects what they purport to be," in accordance
with Section 66 of the Negotiable Instruments Law. The simple reason is that this law is not
applicable to the non-negotiable treasury warrants. The indorsement was made by Gloria
Castillo not for the purpose of guaranteeing the genuineness of the warrants but merely to
deposit them with Metrobank for clearing. It was in fact Metrobank that made the guarantee
when it stamped on the back of the warrants: "All prior indorsement and/or lack of
endorsements guaranteed, Metropolitan Bank & Trust Co., Calapan Branch." LLphil

(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.
xxx xxx xxx

The petitioner lays heavy stress on Jai Alai Corporation v. Bank of the Philippine Islands, 12
but we feel this case is inapplicable to the present controversy. That case involved checks
whereas this case involves treasury warrants. Golden Savings never represented that the
warrants were negotiable but signed them only for the purpose of depositing them for
clearance. Also, the fact of forgery was proved in that case but not in the case before us.
Finally, the Court found the Jai Alai Corporation negligent in accepting the checks without
question from one Antonio Ramirez notwithstanding that the payee was the Inter-Island Gas
Services, Inc. and it did not appear that he was authorized to indorse it. No similar
negligence can be imputed to Golden Savings. LibLex
We find the challenged decision to be basically correct. However, we will have to amend it
insofar as it directs the petitioner to credit Golden Savings with the full amount of the
treasury checks deposited to its account.
The total value of the 32 treasury warrants dishonored was P1,754,089.00, from which
Gomez was allowed to withdraw P1,167,500.00 before Golden Savings was notified of the

dishonor. The amount he has withdrawn must be charged not to Golden Savings but to
Metrobank, which must bear the consequences of its own negligence. But the balance of
P586,589.00 should be debited to Golden Savings, as obviously Gomez can no longer be
permitted to withdraw this amount from his deposit because of the dishonor of the warrants.
Gomez has in fact disappeared. To also credit the balance to Golden Savings would unduly
enrich it at the expense of Metrobank, let alone the fact that it has already been informed of
the dishonor of the treasury warrants. LLpr
WHEREFORE, the challenged decision is AFFIRMED, with the modification that Paragraph 3 of
the dispositive portion of the judgment of the lower court shall be reworded as follows:
3.Debiting Savings Account No. 2498 in the sum of P586,589.00 only
and thereafter allowing defendant Golden Savings & Loan Association,
Inc. to withdraw the amount outstanding thereon, if any, after the debit.
SO ORDERED.

[G.R. No. 89252. May 24, 1993.]

RAUL SESBREO, petitioner, vs. HON. COURT OF APPEALS, DELTA
MOTORS CORPORATION and PILIPINAS BANK, respondents.
Salva, Villanueva & Associates for Delta Motors Corporation.
Reyes, Salazar & Associates for Pilipinas Bank.
FELICIANO, J p:
On 9 February 1981, petitioner Raul Sesbreo made a money market placement in the
amount of P300,000.00 with the Philippine Underwriters Finance Corporation ("Philfinance"),
Cebu Branch; the placement, with a term of thirty-two (32) days, would mature on 13 March
1981. Philfinance, also on 9 February 1981, issued the following documents to petitioner:
(a)the Certificate of Confirmation of Sale, "without recourse," No. 20496
of one (1) Delta Motors Corporation Promissory Note ("DMC PN") No.
2731 for a term of 32 days at 17.0 % per annum;
(b)the Certificate of Securities Delivery Receipt No. 16587 indicating the
sale of DMC PN No. 2731 to petitioner, with the notation that the said
security was in custodianship of Pilipinas Bank, as per Denominated
Custodian Receipt ("DCR") No. 10805 dated 9 February 1981; and
(c)post-dated checks payable on 13 March 1981 (i.e., the maturity date
of petitioner's investment), with petitioner as payee, Philfinance as
drawer, and Insular Bank of Asia and America as drawee, in the total
amount of P304,533.33.
On 13 March 1981, petitioner sought to encash the post-dated checks issued by Philfinance.
However, the checks were dishonored for having been drawn against insufficient funds.
On 26 March 1981, Philfinance delivered to petitioner the DCR No. 10805 issued by private
respondent Pilipinas Bank ("Pilipinas"). It read as follows:
"PILIPINAS BANK
Makati Stock Exchange Bldg.,
Ayala Avenue, Makati,
Metro Manila

TO Raul Sesbreo

February 9,
1981

VALUE DATE

April 6, 1981

MATURITY DATE.
NO. 10805
DENOMINATED CUSTODIAN RECEIPT

'This confirms that as a duly Custodian Bank, and upon instruction of

PHILIPPINE UNDERWRITERS FINANCE CORPORATION, we have in our
custody the following securities to you [sic] the extent herein indicated.

SERIALMAT.FACEISSUEDREGISTEREDAMOUNT
NUMBERDATEVALUEBYHOLDER PAYEE

27314-6-812,300,833.34DMCPHIL.307,933.33
UNDERWRITERS
FINANCE CORP.

We further certify that these securities may be inspected by you or your

duly authorized representative at any time during regular banking hours.
Upon your written instructions we shall undertake physical delivery of
the above securities fully assigned to you should this Denominated
Custodianship Receipt remain outstanding in your favor thirty (30) days
after its maturity.'
PILIPINAS BANK
(By Elizabeth De Villa
Illegible Signature)" 1
On 2 April 1981, petitioner approached Ms. Elizabeth de Villa of private respondent Pilipinas,
Makati Branch, and handed to her a demand letter informing the bank that his placement
with Philfinance in the amount reflected in the DCR No. 10805 had remained unpaid and
outstanding, and that he in effect was asking for the physical delivery of the underlying
promissory note. Petitioner then examined the original of the DMC PN No. 2731 and found:
that the security had been issued on 10 April 1980; that it would mature on 6 April 1981;
that it had a face value of P2,300,833.33, with Philfinance as "payee" and private
respondent Delta Motors Corporation ("Delta") as "maker;" and that on face of the
promissory note was stamped "NON-NEGOTIABLE." Pilipinas did not deliver the Note, nor any
certificate of participation in respect thereof, to petitioner.
Petitioner later made similar demand letters, dated 3 July 1981 and 3 August 1981, 2 again
asking private respondent Pilipinas for physical delivery of the original of DMC PN No. 2731.
Pilipinas allegedly referred all of petitioner's demand letters to Philfinance for written
instructions, as had been supposedly agreed upon in a "Securities Custodianship
Agreement" between Pilipinas and Philfinance. Philfinance never did provide the appropriate
instructions; Pilipinas never released DMC PN No. 2731, nor any other instrument in respect
thereof, to petitioner.

Petitioner also made a written demand on 14 July 1981 3 upon private respondent Delta for
the partial satisfaction of DMC PN No. 2731, explaining that Philfinance, as payee thereof,
had assigned to him said Note to the extent of P307,933.33. Delta, however, denied any
liability to petitioner on the promissory note, and explained in turn that it had previously
agreed with Philfinance to offset its DMC PN No. 2731 (along with DMC PN No. 2730) against
Philfinance PN No. 143-A issued in favor of Delta.
In the meantime, Philfinance, on 18 June 1981, was placed under the joint management of
the Securities and Exchange Commission ("SEC") and the Central Bank. Pilipinas delivered to
the SEC DMC PN No. 2731, which to date apparently remains in the custody of the SEC. 4
As petitioner had failed to collect his investment and interest thereon, he filed on 28
September 1982 an action for damages with the Regional Trial Court ("RTC") of Cebu City,
Branch 21, against private respondents Delta and Pilipinas. 5 The trial court, in a decision
dated 5 August 1987, dismissed the complaint and counterclaims for lack of merit and for
lack of cause of action, with costs against petitioner.
Petitioner appealed to respondent Court of Appeals in C.A.-G.R. CV No. 15195. In a Decision
dated 21 March 1989, the Court of Appeals denied the appeal and held; 6

"Be that as it may, from the evidence on record, if there is anyone that
appears liable for the travails of plaintiff-appellant, it is Philfinance. As
correctly observed by the trial court:
'This act of Philfinance in accepting the investment of
plaintiff and charging it against DMC P.N. No. 2731 when its
entire face value was already obligated or earmarked for set-off
or compensation is difficult to comprehend and may have been
motivated with bad faith. Philfinance, therefore, is solely and
legally obligated to return the investment of plaintiff, together
with its earnings, and to answer all the damages plaintiff has
suffered incident thereto. Unfortunately for plaintiff, Philfinance
was not impleaded as one of the defendants in this case at bar;
hence, this Court is without jurisdiction to pronounce judgment
against it. (p. 11, Decision).'
WHEREFORE, finding no reversible error in the decision appealed from, the same is hereby
affirmed in toto. Cost against plaintiff-appellant."
Petitioner moved for reconsideration of the above Decision, without success.

"Nor could plaintiff-appellant have acquired any right over DMC P.N. No.
2731 as the same is `non-negotiable' as stamped on its face (Exhibit
`6'), negotiation being defined as the transfer of an instrument from one
person to another so as to constitute the transferee the holder of the
instrument (Sec. 30, Negotiable Instruments Law). A person not a holder
cannot sue on the instrument in his own name and cannot demand or
receive payment (Section 51, id.)." 9
Petitioner admits that DMC PN No. 2731 was non-negotiable but contends that that Note
had been validly transferred, in part, to him by assignment and that as a result of such
transfer, Delta as debtor-maker of the Note, was obligated to pay petitioner the portion
of that Note assigned to him by the payee Philfinance. LLjur
Delta, however, disputes petitioner's contention and argues:
(1)that DMC PN No. 2731 was not intended to be negotiated or
otherwise transferred by Philfinance as manifested by the word "nonnegotiable" stamp across the face of the Note 10 and because maker
Delta and payee Philfinance intended that this Note would be offset
against the outstanding obligation of Philfinance represented by
Philfinance PN No. 143-A issued to Delta as payee;

Hence, this Petition for Review on Certiorari.

After consideration of the allegations contained and issues raised in the pleadings, the Court
resolved to give due course to the petition and required the parties to file their respective
memoranda. 7
Petitioner reiterates the assignment of errors he directed at the trial court decision, and
contends that respondent Court of Appeals gravely erred: (i) in concluding that he cannot
recover from private respondent Delta his assigned portion of DMC PN No. 2731; (ii) in failing
to hold private respondent Pilipinas solidarily liable on the DMC PN No. 2731 in view of the
provisions stipulated in DCR No. 10805 issued in favor of petitioner; and (iii) in refusing to
pierce the veil of corporate entity between Philfinance, and private respondents Delta and
Pilipinas, considering that the three (3) entities belong to the "Silverio Group of Companies"
under the leadership of Mr. Ricardo Silverio, Sr. 8
There are at least two (2) sets of relationships which we need to address: firstly, the
relationship of petitioner vis-a-vis Delta; secondly, the relationship of petitioner in respect of
Pilipinas. Actually, of course, there is a third relationship that is of critical importance: the
relationship of petitioner and Philfinance. However, since Philfinance has not been
impleaded in this case, neither the trial court nor the Court of Appeals acquired jurisdiction
over the person of Philfinance. It is, consequently, not necessary for present purposes to
deal with this third relationship, except to the extent it necessarily impinges upon or
intersects the first and second relationships.
I
We consider first the relationship between petitioner and Delta.
The Court of Appeals in effect held that petitioner acquired no rights vis-a-vis Delta in
respect of the Delta promissory note (DMC PN No. 2731) which Philfinance sold "without
recourse" to petitioner, to the extent of P304,533.33. The Court of Appeals said on this point:

(2)that the assignment of DMC PN No. 2731 by Philfinance was without

Delta's consent, if not against its instructions; and
(3)assuming (arguendo only) that the partial assignment in favor of
petitioner was valid, petitioner took that Note subject to the defenses
available to Delta, in particular, the offsetting of DMC PN No. 2731
against Philfinance PN No. 143-A. 11
We consider Delta's arguments seriatim.
Firstly, it is important to bear in mind that the negotiation of a negotiable instrument must
be distinguished from the assignment or transfer of an instrument whether that be
negotiable or non-negotiable. Only an instrument qualifying as a negotiable instrument
under the relevant statute may be negotiated either by indorsement thereof coupled with
delivery, or by delivery alone where the negotiable instrument is in bearer form. A
negotiable instrument may, however, instead of being negotiated, also
be assigned ortransferred. The legal consequences of negotiation as distinguished from
assignment of a negotiable instrument are, of course, different. A non-negotiable instrument
may, obviously, not be negotiated; but it may be assigned or transferred, absent an express
prohibition against assignment or transfer written in the face of the instrument:
"The words 'not negotiable,' stamped on the face of the bill of
lading, did not destroy its assignability, but the sole effect was to
exempt the bill from the statutory provisions relative thereto, and a bill,
though not negotiable, may be transferred by assignment; the assignee
taking subject to the equities between the original
parties." 12 (Emphasis added)
DMC PN No. 2731, while marked "non-negotiable," was not at the same time stamped "nontransferrable" or "non-assignable." It contained no stipulation which prohibited Philfinance
from assigning or transferring, in whole or in part, that Note.

Delta adduced the "Letter of Agreement" which it had entered into with Philfinance and
which should be quoted in full:
"Apr
il 10, 1980
Philippine Underwriters Finance Corp.
Benavidez St., Makati
Metro Manila.

necessary for the validity and enforceability of the assignment in favor of

petitioner. 14 Delta's argument that Philfinance's sale or assignment of part of its rights to
DMC PN No. 2731 constituted conventional subrogation, which required its (Delta's) consent,
is quite mistaken. Conventional subrogation, which in the first place is never lightly
inferred, 15 must be clearly established by the unequivocal terms of the substituting
obligation or by the evident incompatibility of the new and old obligations on every
point. 16 Nothing of the sort is present in the instant case.

It is in fact difficult to be impressed with Delta's complaint, since it released its DMC PN No.
2731 to Philfinance, an entity engaged in the business of buying and selling debt
instruments and other securities, and more generally, in money market transactions.
In Perez v. Court of Appeals, 1 7 the Court, speaking through Mme. Justice Herrera, made the
following important statement: Cdpr

Attention: Mr. Alfredo O. Banaria

SVP-Treasurer
GENTLEMEN:
This refers to our outstanding placement of P4,601,666.67 as evidenced
by your Promissory Note No. 143-A, dated April 10, 1980, to mature on
April 6, 1981.
As agreed upon, we enclose our non-negotiable Promissory Note No.
2730 and 2731 for P2,000,000.00 each, dated April 10, 1980, to be
offsetted [sic] against your PN No. 143-A upon co-terminal maturity.
Please deliver the proceeds of our PNs to our representative, Mr. Eric
Castillo.

Yours,

Very Truly

(Sgd.)
Florencio B.
Biagan
Senior Vice
President" 13
We find nothing in his "Letter of Agreement" which can be reasonably construed as a
prohibition upon Philfinance assigning or transferring all or part of DMC PN No. 2731, before
the maturity thereof. It is scarcely necessary to add that, even had this "Letter of
Agreement" set forth an explicit prohibition of transfer upon Philfinance, such a prohibition
cannot be invoked against an assignee or transferee of the Note who parted with valuable
consideration in good faith and without notice of such prohibition. It is not disputed that
petitioner was such an assignee or transferee. Our conclusion on this point is reinforced by
the fact that what Philfinance and Delta were doing by their exchange of promissory notes
was this: Delta invested, by making a money market placement with Philfinance,
approximately P4,600,000.00 on 10 April 1980; but promptly, on the same day, borrowed
back the bulk of that placement, i.e., P4,000,000.00, by issuing its two (2) promissory notes:
DMC PN No. 2730 and DMC PN No. 2731, both also dated 10 April 1980. Thus, Philfinance
was left with not P4,600,000.00 but only P600,000.00 in cash and the two (2) Delta
promissory notes.
Apropos Delta's complaint that the partial assignment by Philfinance of DMC PN No. 2731
had been effected without the consent of Delta, we note that such consent was not

"There is another aspect to this case. What is involved here is a money

market transaction. As defined by Lawrence Smith `the money market is
a market dealing in standardized short-term credit instruments
(involving large amounts) where lenders and borrowers do not deal
directly with each other but through a middle man or dealer in the open
market.' It involves 'commercial papers' which are instruments
'evidencing indebtedness of any person or entity . . ., which are issued,
endorsed, sold or transferred or in any manner conveyed to another
person or entity, with or without recourse'. The fundamental function of
the money market device in its operation is to match and bring together
in a most impersonal manner both the 'fund users' and the 'fund
suppliers.' The money market is an 'impersonal market', free from
personal considerations.' The market mechanism is intended to provide
quick mobility of money and securities.'
The impersonal character of the money market device overlooks the
individual or entities concerned. The issuer of a commercial paper in the
money market necessarily knows in advance that it would be
expeditiously transacted and transferred to any investor/lender without
need of notice to said issuer. In practice, no notification is given to the
borrower or issuer of commercial paper of the sale or transfer to the
investor.
xxx xxx xxx
There is need to individuate a money market transaction, a relatively
novel institution in the Philippine commercial scene. It has been
intended to facilitate the flow and acquisition of capital on an
impersonal basis. And as specifically required by Presidential Decree No.
678, the investing public must be given adequate and effective
protection in availing of the credit of a borrower in the commercial
paper market." 18(Citations omitted; emphasis supplied)
We turn to Delta's arguments concerning alleged compensation or offsetting between DMC
PN No. 2731 and Philfinance PN No. 143-A. It is important to note that at the time Philfinance
sold part of its rights under DMC PN No. 2731 to petitioner on 9 February 1981, no
compensation had as yet taken place and indeed none could have taken place. The essential
requirements of compensation are listed in the Civil Code as follows:

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

(1)That each one of the obligors be bound principally, and that he be at
the same time a principal creditor of the other;
(2)That both debts consist in a sum of money, or if the things due are
consumable, they be of the same kind, and also of the same qualify if
the latter has been stated;
(3)That the two debts are due;
(4)That they be liquidated and demandable;
(5)That over neither of them there be any retention or controversy,
commenced by third persons and communicated in due time to the
debtor." (Emphasis supplied)
On 9 February 1981, neither DMC PN No. 2731 nor Philfinance PN No. 143-A was due.
This was explicitly recognized by Delta in its 10 April 1980 "Letter of Agreement" with
Philfinance, where Delta acknowledged that the relevant promissory notes were "to be
offsetted (sic) against [Philfinance] PN No. 143-A upon co-terminal maturity."
As noted, the assignment to petitioner was made on 9 February 1981 or from forty-nine (49)
days before the "co-terminal maturity" date, that is to say, before any compensation had
taken place. Further, the assignment to petitioner would have prevented compensation from
taking place between Philfinance and Delta, to the extent of P304,533.33, because upon
execution of the assignment in favor of petitioner, Philfinance and Delta would have ceased
to be creditors and debtors of each other in their own right to the extent of the amount
assigned by Philfinance to petitioner. Thus, we conclude that the assignment effected by
Philfinance in favor of petitioner was a valid one and that petitioner accordingly became
owner of DMC PN No. 2731 to the extent of the portion thereof assigned to him.
The record shows, however, that petitioner notified Delta of the fact of the assignment to
him only on 14 July 1981, 19 that is, after the maturity not only of the money market
placement made by petitioner but also of both DMC PN No. 2731 and Philfinance PN No. 143A. In other words, petitioner notified Delta of his rights as assignee after compensation had
taken place by operation of law because the offsetting instruments had both reached
maturity. It is a firmly settled doctrine that the rights of an assignee are not any greater than
the rights of the assignor, since the assignee is merely substituted in the place of the
assignor 20 and that the assignee acquires his rights subject to the equities i.e., the
defenses which the debtor could have set up against the original assignor before notice of
the assignment was given to the debtor. Article 1285 of the Civil Code provides that:
"ART. 1285.The debtor who has consented to the assignment of rights
made by a creditor in favor of a third person, cannot set up against the
assignee the compensation which would pertain to him against the
assignor, unless the assignor was notified by the debtor at the time he
gave his consent, that he reserved his right to the compensation.
If the creditor communicated the cession to him but the debtor did not
consent thereto, the latter may set up the compensation of
debts previous to the cession, but not of subsequent ones.

If the assignment is made without the knowledge of the debtor, he may

set up the compensation of all credits prior to the same and also later
ones until he had knowledge of the assignment." (Emphasis
supplied).llcd
Article 1626 of the same Code states that: "the debtor who, before having knowledge of
the assignment, pays his creditor shall be released from the obligation." In Sison v. YapTico, 21 the Court explained that:
"[n]o man is bound to remain a debtor; he may pay to him with whom
he contracted to pay; and if he pay before notice that his debt has been
assigned, the law holds him exonerated, for the reason that it is the duty
of the person who has acquired a title by transfer to demand payment of
the debt, to give his debtor notice." 22
At the time that Delta was first put to notice of the assignment in petitioner's favor on
14 July 1981, DMC PN No. 2731 had already been discharged by compensation. Since
the assignor Philfinance could not have then compelled payment anew by Delta of DMC
PN No. 2731, petitioner, as assignee of Philfinance, is similarly disabled from collecting
from Delta the portion of the Note assigned to him.
It bears some emphasis that petitioner could have notified Delta of the assignment in his
favor as soon as that assignment or sale was effected on 9 February 1981. He could have
also notified Delta as soon as his money market placement matured on 13 March 1981
without payment thereof being made by Philfinance; at that time, compensation had yet to
set in and discharge DMC PN No. 2731. Again, petitioner could have notified Delta on 26
March 1981 when petitioner received from Philfinance the Denominated Custodianship
Receipt ("DCR") No. 10805 issued by private respondent Pilipinas in favor of petitioner.
Petitioner could, in fine, have notified Delta at any time before the maturity date of DMC PN
No. 2731. Because petitioner failed to do so, and because the record is bare of any
indication that Philfinance had itself notified Delta of the assignment to petitioner, the Court
is compelled to uphold the defense of compensation raised by private respondent Delta. Of
course, Philfinance remains liable to petitioner under the terms of the assignment made by
Philfinance to petitioner.
II
We turn now to the relationship between petitioner and private respondent Pilipinas.
Petitioner contends that Pilipinas became solidarily liable with Philfinance and Delta when
Pilipinas issued DCR No. 10805 with the following words:
"Upon your written instructions, we [Pilipinas] shall undertake physical
delivery of the above securities fully assigned to you " 23
The Court is not persuaded. We find nothing in the DCR that establishes an obligation on the
part of Pilipinas to pay petitioner the amount of P307,933.33 nor any assumption of
liability in solidum with Philfinance and Delta under DMC PN No. 2731. We read the DCR as a
confirmation on the part of Pilipinas that:
(1)it has in its custody, as duly constituted custodian bank, DMC PN No.
2731 of a certain face value, to mature on 6 April 1981 and payable to
the order of Philfinance;

(2)Pilipinas was, from and after said date of the assignment by

Philfinance to petitioner (9 February 1981), holding that Note on behalf
and for the benefit of petitioner, at least to the extent it had been
assigned to petitioner by payee Philfinance; 24
(3)petitioner may inspect the Note either "personally or by authorized
representative", at any time during regular bank hours; and
(4)upon written instructions of petitioner, Pilipinas would physically
deliver the DMC PN No. 2731 (or a participation therein to the extent of
P307,933.33) "should this Denominated Custodianship Receipt remain
outstanding in [petitioner's] favor thirty (30) days after its maturity."
Thus, we find nothing written in printers ink on the DCR which could reasonably be read as
converting Pilipinas into an obligor under the terms of DMC PN No. 2731 assigned to
petitioner, either upon maturity thereof or at any other time. We note that both in his
complaint and in his testimony before the trial court, petitioner referred merely to the
obligation of private respondent Pilipinas to effect physical delivery to him of DMC PN No.
2731. 25 Accordingly, petitioner's theory that Pilipinas had assumed a solidary obligation to
pay the amount represented by the portion of the Note assigned to him by Philfinance,
appears to be a new theory constructed only after the trial court had ruled against him. The
solidary liability that petitioner seeks to impute to Pilipinas cannot, however, be lightly
inferred. Under Article 1207 of the Civil Code, "there is a solidary liability only when the
obligation expressly so states, or when the law or the nature of the obligation requires
solidarity." The record here exhibits no express assumption of solidary liability vis-a-vis
petitioner, on the part of Pilipinas. Petitioner has not pointed us to any law which imposed
such liability upon Pilipinas nor has petitioner argued that the very nature of the
custodianship assumed by private respondent Pilipinas necessarily implies solidary liability
under the securities, custody of which was taken by Pilipinas. Accordingly, we are unable to
hold Pilipinas solidarily liable with Philfinance and private respondent Delta under DMC PN
No. 2731.

We do not, however, mean to suggest that Pilipinas has no responsibility and liability in
respect of petitioner under the terms of the DCR. To the contrary, we find, after prolonged
analysis and deliberation, that private respondent Pilipinas had breached its undertaking
under the DCR to petitioner Sesbreo. llcd
We believe and so hold that a contract of deposit was constituted by the act of Philfinance in
designating Pilipinas as custodian or depositary bank. The depositor was initially Philfinance;
the obligation of the depositary was owed, however, to petitioner Sesbreo as beneficiary of
the custodianship or depositary agreement. We do not consider that this is a simple case of
a stipulation pour autrui. The custodianship or depositary agreement was established as an
integral part of the money market transaction entered into by petitioner with Philfinance.
Petitioner bought a portion of DMC PN No. 2731; Philfinance as assignor-vendor deposited
that Note with Pilipinas in order that the thing sold would be placed outside the control of
the vendor. Indeed, the constituting of the depositary or custodianship agreement was
equivalent to constructive delivery of the Note (to the extent it had been sold or assigned to
petitioner) to petitioner. It will be seen that custodianship agreements are designed to
facilitate transactions in the money market by providing a basis for confidence on the part of
the investors or placers that the instruments bought by them are effectively taken out of the
pocket, as it were, of the vendors and placed safely beyond their reach, that those
instruments will be there available to the placers of funds should they have need of them.

The depositary in a contract of deposit is obliged to return the security or the thing
deposited upon demand of the depositor (or, in the present case, of the beneficiary) of the
contract, even though a term for such return may have been established in the said
contract. 26 Accordingly, any stipulation in the contract of deposit or custodianship that runs
counter to the fundamental purpose of that agreement or which was not brought to the
notice of and accepted by the placer-beneficiary, cannot be enforced as against such
beneficiary-placer.
We believe that the position taken above is supported by considerations of public policy. If
there is any party that needs the equalizing protection of the law in money market
transactions, it is the members of the general public who place their savings in such market
for the purpose of generating interest revenues. 27 The custodian bank, if it is not related
either in terms of equity ownership or management control to the borrower of the funds, or
the commercial paper dealer, is normally a preferred or traditional banker of such borrower
or dealer (here, Philfinance). The custodian bank would have every incentive to protect the
interest of its client the borrower or dealer as against the placer of funds. The providers of
such funds must be safeguarded from the impact of stipulations privately made between the
borrowers or dealers and the custodian banks, and disclosed to fund-providers only after
trouble has erupted.
In the case at bar, the custodian-depositary bank Pilipinas refused to deliver the security
deposited with it when petitioner first demanded physical delivery thereof on 2 April 1981.
We must again note, in this connection, that on 2 April 1981, DMC PN No. 2731 had not yet
matured and therefore, compensation or offsetting against Philfinance PN No. 143-A
had not yet taken place. Instead of complying with the demand of petitioner, Pilipinas
purported to require and await the instructions of Philfinance, in obvious contravention of its
undertaking under the DCR to effect physical delivery of the Note upon receipt of "written
instructions" from petitioner Sesbreo. The ostensible term written into the DCR (i.e.,
"should this [DCR] remain outstanding in your favor thirty [30] days after its maturity") was
not a defense against petitioner's demand for physical surrender of the Note on at least
three grounds: firstly, such term was never brought to the attention of petitioner Sesbreo at
the time the money market placement with Philfinance was made; secondly, such term runs
counter to the very purpose of the custodianship or depositary agreement as an integral
part of a money market transaction; and thirdly, it is inconsistent with the provisions of
Article 1988 of the Civil Code noted above. Indeed, in principle, petitioner became entitled to
demand physical delivery of the Note held by Pilipinas as soon as petitioner's money market
placement matured on 13 March 1981 without payment from Philfinance.
We conclude, therefore, that private respondent Pilipinas must respond to petitioner for
damages sustained by him arising out of its breach of duty. By failing to deliver the Note to
the petitioner as depositor-beneficiary of the thing deposited, Pilipinas effectively and
unlawfully deprived petitioner of the Note deposited with it. Whether or not Pilipinas itself
benefited from such conversion or unlawful deprivation inflicted upon petitioner, is of no
moment for present purposes.' Prima facie, the damages suffered by petitioner consisted of
P304,533.33, the portion of the DMC PN No. 2731 assigned to petitioner but lost by him by
reason of discharge of the Note by compensation, plus legal interest of six percent (6%) per
annum counting from 14 March 1981.
The conclusion we have here reached is, of course, without prejudice to such right of
reimbursement as Pilipinas may have vis-a-vis Philfinance.
III

The third principal contention of petitioner that Philfinance and private respondents Delta
and Pilipinas should be treated as one corporate entity need not detain us for long. LLphil
In the first place, as already noted, jurisdiction over the person of Philfinance was never
acquired either by the trial court nor by the respondent Court of appeals. Petitioner similarly
did not seek to implead Philfinance in the Petition before us.
Secondly, it is not disputed that Philfinance and private respondents Delta and Pilipinas have
been organized as separate corporate entities. Petitioner asks us to pierce their separate
corporate entities, but has been able only to cite the presence of a common Director Mr.
Ricardo Silverio, Sr., sitting on the Boards of Directors of all three (3) companies. Petitioner
has neither alleged nor proved that one or another of the three (3) concededly related
companies used the other two (2) as mere alter egos or that the corporate affairs of the
other two (2) were administered and managed for the benefit of one. There is simply not
enough evidence of record to justify disregarding the separate corporate personalities of
Delta and Pilipinas and to hold them liable for any assumed or undetermined liability of
Philfinance to petitioner. 28
WHEREFORE, for all the foregoing, the Decision and Resolution of the Court of Appeals in
C.A.-G.R. CV No. 15195 dated 21 March 1989 and 17 July 1989, respectively, are hereby
MODIFIED and SET ASIDE, to the extent that such Decision and Resolution had dismissed
petitioner's complaint against Pilipinas Bank. Private respondent Pilipinas Bank is hereby
ORDERED to indemnify petitioner for damages in the amount of P304,533.33, plus legal
interest thereon at the rate of six percent (6%) per annum counted from 2 April 1981. As so
modified, the Decision and Resolution of the Court of Appeals are hereby AFFIRMED. No
pronouncement as to costs.
SO ORDERED.

DATEWITHDRAWALAMOUNT
[G.R. No. 113236. March 5, 2001.]

SLIP NO.

FIRESTONE TIRE & RUBBER COMPANY OF THE

PHILIPPINES, petitioner, vs. COURT OF APPEALS and LUZON
DEVELOPMENT BANK, respondents.
June 15, 197842127P1,198,092.80

DECISION

July 15, 197842128940,190.00

Aug. 15, 197842129880,000.00

QUISUMBING, J p:

Sep. 15, 197842130981,500.00

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

These were likewise deposited by plaintiff in its current account with

Citibank and in turn the Citibank forwarded it [sic] to the defendant for
payment and collection, as it had done in respect of the previous special
withdrawal slips. Out of these four (4) withdrawal slips only withdrawal
slip No. 42130 in the amount of P981,500.00 was honored and paid by
the defendant in October 1978. Because of the absence for a long
period coupled with the fact that defendant honored and paid
withdrawal slips No. 42128 dated July 15, 1978, in the amount of
P981,500.00 plaintiff's belief was all the more strengthened that the
other withdrawal slips were likewise sufficiently funded, and that it had
received full value and payment of Fojas-Arca's credit purchased then
outstanding at the time. On this basis, plaintiff was induced to continue
extending to Fojas-Arca further purchase on credit of its products as per
agreement (Exh. "B").

The facts of this case, adopted by the CA and based on findings by the trial court, are as
follows:
. . . [D]efendant is a banking corporation. It operates under a certificate
of authority issued by the Central Bank of the Philippines, and among its
activities, accepts savings and time deposits. Said defendant had as one
of its client-depositors the Fojas-Arca Enterprises Company ("Fojas-Arca"
for brevity). Fojas-Arca maintaining a special savings account with the
defendant, the latter authorized and allowed withdrawals of funds
therefrom through the medium of special withdrawal slips. These are
supplied by the defendant to Fojas-Arca.
In January 1978, plaintiff and Fojas-Arca entered into a "Franchised
Dealership Agreement" (Exh. B) whereby Fojas-Arca has the privilege to
purchase on credit and sell plaintiff's products.
On January 14, 1978 up to May 15, 1978. Pursuant to the aforesaid
Agreement, Fojas-Arca purchased on credit Firestone products from
plaintiff with a total amount of P4,896,000.00. In payment of these
purchases, Fojas-Arca delivered to plaintiff six (6) special withdrawal
slips drawn upon the defendant. In turn, these were deposited by the
plaintiff with its current account with the Citibank. All of them were
honored and paid by the defendant. This singular circumstance made
plaintiff believe [sic] and relied [sic] on the fact that the succeeding
special withdrawal slips drawn upon the defendant would be equally
sufficiently funded. Relying on such confidence and belief and as a direct
consequence thereof, plaintiff extended to Fojas-Arca other purchases
on credit of its products.
On the following dates Fojas-Arca purchased Firestone products on credit
(Exh. M, I, J, K) and delivered to plaintiff the corresponding special
withdrawal slips in payment thereof drawn upon the defendant, to wit:

However, on December 14, 1978, plaintiff was informed by Citibank that

special withdrawal slips No. 42127 dated June 15, 1978 for
P1,198,092.80 and No. 42129 dated August 15, 1978 for P880,000.00
were dishonored and not paid for the reason 'NO ARRANGEMENT.' As a
consequence, the Citibank debited plaintiff's account for the total sum of
P2,078,092.80 representing the aggregate amount of the above-two
special withdrawal slips. Under such situation, plaintiff averred that the
pecuniary losses it suffered is caused by and directly attributable to
defendant's gross negligence. ISADET
On September 25, 1979, counsel of plaintiff served a written demand
upon the defendant for the satisfaction of the damages suffered by it.
And due to defendant's refusal to pay plaintiff's claim, plaintiff has been
constrained to file this complaint, thereby compelling plaintiff to incur
litigation expenses and attorney's fees which amount are recoverable
from the defendant.
Controverting the foregoing asseverations of plaintiff, defendant
asserted, inter alia that the transactions mentioned by plaintiff are that
of plaintiff and Fojas-Arca only, [in] which defendant is not involved;
Vehemently, it was denied by defendant that the special withdrawal
slips were honored and treated as if it were checks, the truth being that
when the special withdrawal slips were received by defendant, it only

verified whether or not the signatures therein were authentic, and

whether or not the deposit level in the passbook concurred with the
savings ledger, and whether or not the deposit is sufficient to cover the
withdrawal; if plaintiff treated the special withdrawal slips paid by FojasArca as checks then plaintiff has to blame itself for being grossly
negligent in treating the withdrawal slips as check when it is clearly
stated therein that the withdrawal slips are non-negotiable; that
defendant is not a privy to any of the transactions between Fojas-Arca
and plaintiff for which reason defendant is not duty bound to notify nor
give notice of anything to plaintiff. If at first defendant had given notice
to plaintiff it is merely an extension of usual bank courtesy to a
prospective client; that defendant is only dealing with its depositor
Fojas-Arca and not the plaintiff. In summation, defendant categorically
stated that plaintiff has no cause of action against it (pp. 1-3, Dec.; pp.
368-370, id). 3
Petitioner's complaint 4 for a sum of money and damages with the Regional Trial Court of
Pasay City, Branch 113, docketed as Civil Case No. 29546, was dismissed together with the
counterclaim of defendant.
Petitioner appealed the decision to the Court of Appeals. It averred that respondent Luzon
Development Bank was liable for damages under Article 2176 5 in relation to Articles
19 6 and 20 7 of the Civil Code. As noted by the CA, petitioner alleged the following tortious
acts on the part of private respondent: 1) the acceptance and payment of the special
withdrawal slips without the presentation of the depositor's passbook thereby giving the
impression that the withdrawal slips are instruments payable upon presentment; 2) giving
the special withdrawal slips the general appearance of checks; and 3) the failure of
respondent bank to seasonably warn petitioner that it would not honor two of the four
special withdrawal slips.
On December 29, 1993, the Court of Appeals promulgated its assailed decision. It denied the
appeal and affirmed the judgment of the trial court. According to the appellate court,
respondent bank notified the depositor to present the passbook whenever it received a
collection note from another bank, belying petitioner's claim that respondent bank was
negligent in not requiring a passbook under the subject transaction. The appellate court also
found that the special withdrawal slips in question were not purposely given the appearance
of checks, contrary to petitioner's assertions, and thus should not have been mistaken for
checks. Lastly, the appellate court ruled that the respondent bank was under no obligation
to inform petitioner of the dishonor of the special withdrawal slips, for to do so would have
been a violation of the law on the secrecy of bank deposits.
Hence, the instant petition, alleging the following assignment of error:
25.The CA grievously erred in holding that the [Luzon Development]
Bank was free from any fault or negligence regarding the
dishonor, or in failing to give fair and timely advice of the
dishonor, of the two intermediate LDB Slips and in failing to
award damages to Firestone pursuant to Article 2176 of the
New Civil Code. 8
The issue for our consideration is whether or not respondent bank should be held liable for
damages suffered by petitioner, due to its allegedly belated notice of non-payment of the
subject withdrawal slips.

The initial transaction in this case was between petitioner and Fojas-Arca, whereby the latter
purchased tires from the former with special withdrawal slips drawn upon Fojas-Arca's
special savings account with respondent bank. Petitioner in turn deposited these withdrawal
slips with Citibank. The latter credited the same to petitioner's current account, then
presented the slips for payment to respondent bank. It was at this point that the bone of
contention arose.
On December 14, 1978, Citibank informed petitioner that special withdrawal slips Nos.
42127 and 42129 dated June 15, 1978 and August 15, 1978, respectively, were refused
payment by respondent bank due to insufficiency of Fojas-Arca's funds on deposit. That
information came about six months from the time Fojas-Arca purchased tires from petitioner
using the subject withdrawal slips. Citibank then debited the amount of these withdrawal
slips from petitioner's account, causing the alleged pecuniary damage subject of petitioner's
cause of action.
At the outset, we note that petitioner admits that the withdrawal slips in question were nonnegotiable. 9Hence, the rules governing the giving of immediate notice of dishonor of
negotiable instruments do not apply in this case. 10 Petitioner itself concedes this
point. 11 Thus, respondent bank was under no obligation to give immediate notice that it
would not make payment on the subject withdrawal slips. Citibank should have known that
withdrawal slips were not negotiable instruments. It could not expect these slips to be
treated as checks by other entities. Payment or notice of dishonor from respondent bank
could not be expected immediately, in contrast to the situation involving checks.

In the case at bar, it appears that Citibank, with the knowledge that respondent Luzon
Development Bank, had honored and paid the previous withdrawal slips, automatically
credited petitioner's current account with the amount of the subject withdrawal slips, then
merely waited for the same to be honored and paid by respondent bank. It presumed that
the withdrawal slips were "good."
It bears stressing that Citibank could not have missed the non-negotiable nature of the
withdrawal slips. The essence of negotiability which characterizes a negotiable paper as a
credit instrument lies in its freedom to circulate freely as a substitute for money. 12 The
withdrawal slips in question lacked this character.
A bank is under obligation to treat the accounts of its depositors with meticulous care,
whether such account consists only of a few hundred pesos or of millions of pesos. 13 The
fact that the other withdrawal slips were honored and paid by respondent bank was no
license for Citibank to presume that subsequent slips would be honored and paid
immediately. By doing so, it failed in its fiduciary duty to treat the accounts of its clients with
the highest degree of care. 14
In the ordinary and usual course of banking operations, current account deposits are
accepted by the bank on the basis of deposit slips prepared and signed by the depositor, or
the latter's agent or representative, who indicates therein the current account number to
which the deposit is to be credited, the name of the depositor or current account holder, the
date of the deposit, and the amount of the deposit either in cash or in check. 15
The withdrawal slips deposited with petitioner's current account with Citibank were not
checks, as petitioner admits. Citibank was not bound to accept the withdrawal slips as a
valid mode of deposit. But having erroneously accepted them as such, Citibank and

petitioner as account-holder must bear the risks attendant to the acceptance of these
instruments. Petitioner and Citibank could not now shift the risk and hold private respondent
liable for their admitted mistake.
WHEREFORE, the petition is DENIED and the decision of the Court of Appeals in CA-G.R. CV
No. 29546 is AFFIRMED. Costs against petitioner.
SO ORDERED. AaITCS

[G.R. No. L-2516. September 25, 1950.]

ANG TEK LIAN, petitioner, vs. THE COURT OF APPEALS, respondent.
Laurel, Sabido, Almario & Laurel, for petitioner.
Solicitor General Felix Bautista Angelo and Solicitor Manuel Tomacruz, for
respondent.
SYLLABUS
1.CRIMINAL LAW; ESTAFA"; ISSUING CHECK WITH INSUFFICIENT BANK DEPOSIT
TO COVER THE SAME. One who issues a check payable to cash to accomplish deceit
and knows that at the time had no sufficient deposit with the bank to cover the amount
of the check and without informing the payee of such circumstances, is guilty
of estafa as provided by article 315, paragraph (d), subsection 2 of the Revised Penal
Code.
2.NEGOTIABLE INSTRUMENTS; CHECK DRAWN PAYABLE TO THE ORDER OF
"CASH"; INDORSEMENT. A check payable to the order of "cash to the person
presenting it for payment without the drawer's indorsement.
DECISION
BENGZON, J p:
For having issued a rubber check, Ang Tek Lian was convicted of estafa in the
Court of First Instance of Manila. The Court of Appeals affirmed the verdict.
It appears that, knowing he had no funds therefor, Ang Tek Lian drew on
Saturday, November 16, 1946, the check Exhibit A upon the China Banking Corporation
for the sum of P4,000, payable to the order of "cash". He delivered it to Lee Hua Hong in
exchange for money which the latter handed in the act. On November 18, 1946, the
next business day, the check was presented by Lee Hua Hong to the drawee bank for
payment, but it was dishonored for insufficiency of funds, the balance of the deposit of
Ang Tek Lian on both dates being P335 only.
The Court of Appeals believed the version of Lee Huan Hong who testified that
"on November 16, 1946, appellant went to his (complainant's) office, at 1217 Herran,
Paco, Manila, and asked him to exchange Exhibit A which he (appellant) then brought
with him with cash alleging that he needed badly the sum of P4,000 represented by
the check, but could not withdraw it from the bank, it being then already closed; that in
view of this request and relying upon appellant's assurance that he had sufficient funds
in the bank to meet Exhibit A, and because they used to borrow money from each other,
even before the war, and appellant owns a hotel and restaurant known as the North Bay
Hotel, said complainant delivered to him, on the same date, the sum of P4,000 in cash;
that despite repeated efforts to notify him that the check had been dishonored by the
bank, appellant could not be located any-where, until he was summoned in the City
Fiscal's Office in view of the complaint for estafa filed in connection therewith; and that
appellant has not paid as yet the amount of the check, or any part thereof."
Inasmuch as the findings of fact of the Court of Appeals are final, the only
question of law for decision is whether under the facts found, estafa had been
accomplished.
Article 315, paragraph (d), subsection 2 of the Revised Penal Code, punishes
swindling committed "By post-dating a check, or issuing such check in payment of an
obligation the offender knowing that at the time he had no funds in the bank, or the
funds deposited by him in the bank were not sufficient to cover the amount of the
check, and without informing the payee of such circumstances"
We believe that under this provision of law Ang Tek Lian was properly held
liable. In this connection, it must be stated that, as explained in People vs. Fernandez

(59 Phil., 615), estafa is committed by issuing either a postdated check or an ordinary
check to accomplish the deceit.
It is argued, however, that as the check had been made payable to "cash" and
had not been endorsed by Ang Tek Lian, the defendant is not guilty of the offense
charged. Based on the proposition that "by uniform practice of all banks in the
Philippines a check so drawn is invariably dishonored," the following line of reasoning is
advanced in support of the argument:
". . . When, therefore, he (the offended party) accepted the
check (Exhibit A) from the appellant, he did so with full knowledge that it
would be dishonored upon presentment. In that sense, the appellant
could not be said to have acted fraudulently because the complainant,
in so accepting the check as it was drawn, must be considered, by every
rational consideration, to have done so fully aware of the risk he was
running thereby." (Brief for the appellant, p. 11.)
We are not aware of the uniformity of such practice. Instances have
undoubtedly occurred wherein the Bank required the indorsement of the drawer before
honoring a check payable to "cash." But cases there are too, where no such requirement
had been made. It depends upon the circumstances of each transaction.
Under the Negotiable Instruments Law (sec. 9 [d], a check drawn payable to
the order of "cash" is a check payable to bearer, and the bank may pay it to the person
presenting it for payment without the drawer's indorsement.
"A check payable to the order of cash is a bearer instrument.
Bacal vs. National City Bank of New York (1933), 146 Misc., 732; 262 N.
Y. S., 839; Cleary vs. Da Beck Plate Glass Co. (1907), 54 Misc., 537; 104
N. Y. S., 831; Massachusetts Bonding & Insurance Co. vs. Pittsburgh Pipe
& Supply Co. (Tex. Civ. App., 1939), 135 S. W. (2d), 818. See also H. Cook
& Son vs. Moody (1916), 17 Ga. App., 465; 87 S. E., 713."
"Where a check is made payable to the order of 'cash', the
word cash 'does not purport to be the name of any person', and hence
the instrument is payable to bearer. The drawee bank need not obtain
any indorsement of the check, but may pay it to the person presenting it
without any indorsement. . . ." (Zollmann, Banks and Banking,
Permanent Edition, Vol. 6, p. 494.)
Of course, if the bank is not sure of the bearer's identity or financial solvency, it
has the right to demand identification and/or assurance against possible complications,
for instance, (a) forgery of drawer's signature, (b) loss of the check by the rightful
owner, (c) raising of the amount payable, etc. The bank may therefore require, for its
protection, that the indorsement of the drawer or of some other person known to it
be obtained. But where the Bank is satisfied of the identity and/or the economic
standing of the bearer who tenders the check for collection, it will pay the instrument
without further question; and it would incur no liability to the drawer in thus acting.
"A check payable to bearer is authority for payment to the
holder. Where a check is in the ordinary form, and is payable to bearer,
so that no indorsement is required, a bank, to which it is presented for
payment, need not have the holder identified, and is not negligent in

failing to do so. . . ." (Michie on Banks and Banking, Permanent Edition,

Vol. 5, p. 343.)
". . . Consequently, a drawee bank to which a bearer check is
presented for payment need not necessarily have the holder identified
and ordinarily may not be charged with negligence in failing to do so.
See Opinions 6C:2 and 6C:3. If the bank has no reasonable cause for
suspecting any irregularity, it will be protected in paying a bearer check,
'no matter what facts unknown to it may have occurred prior to the
presentment.' 1 Morse, Banks and Banking, sec. 393.
"Although a bank is entitled to pay the amount of a bearer
check without further inquiry, it is entirely reasonable for the bank to
insist that the holder give satisfactory proof of his identity . . .." (Paton's
Digest, Vol. I, p. 1089.)
Anyway, it is significant, and conclusive, that the form of the check Exhibit A
was totally unconnected with its dishonor. The Court of Appeals declared that it was
returned unsatisfied because the drawer had insufficient funds not because the
drawer's indorsement was lacking.
Wherefore, there being no question as to the correctness of the penalty
imposed on the appellant, the writ of certiorari is denied and the decision of the Court of
Appeals is hereby affirmed, with costs.
Moran, C.J., Ozaeta, Paras, Pablo, Tuason, and Reyes, JJ., concur.

DECISION
[G.R. No. 85419. March 9, 1993.]
DEVELOPMENT BANK OF RIZAL, plaintiff-petitioner, vs. SIMA WEI
and/or LEE KIAN HUAT, MARY CHENG UY, SAMSON TUNG, ASIAN
INDUSTRIAL PLASTIC CORPORATION and PRODUCERS BANK OF
THE PHILIPPINES, defendants-respondents.

Yngson & Associates for petitioner.

Henry A. Reyes & Associates for Samso Tung & Asian Industrial Plastic Corporation.

CAMPOS, JR., J p:
On July 6, 1986, the Development Bank of Rizal (petitioner Bank for brevity)
filed a complaint for a sum of money against respondents Sima Wei and/or Lee Kian
Huat, Mary Cheng Uy, Samson Tung, Asian Industrial Plastic Corporation (Plastic
Corporation for short) and the Producers Bank of the Philippines, on two causes of
action:
(1)To enforce payment of the balance of P1,032,450.02 on a promissory
note executed by respondent Sima Wei on June 9, 1983; and

Eduardo G. Castelo for Sima Wei.

Monsod, Tamargo & Associates for Producers Bank.
Rafael S. Santayana for Mary Cheng Uy.

SYLLABUS
1.REMEDIAL LAW; CAUSE OF ACTION; DEFINITION AND ESSENTIAL ELEMENTS. A cause of
action is defined as an act or omission of one party in violation of the legal right or rights of
another. The essential elements are: (1) legal right of the plaintiff; (2) correlative obligation
of the defendant; and (3) an act or omission of the defendant in violation of said legal right.
2.ID.; APPEAL; PARTY CANNOT CHANGE HIS THEORY ON APPEAL; REASON. In the original
complaint, petitioner Bank, as plaintiff, sued respondent Sima Wei on the promissory note,
and the alternative defendants, including Sima Wei, on the two checks. On appeal from the
orders of dismissal of the Regional Trial Court, petitioner Bank alleged that its cause of action
was not based on collecting the sum of money evidenced by the negotiable instruments
stated but on quasi-delict a claim for damages on the ground of fraudulent acts and
evident bad faith of the alternative respondents. This was clearly an attempt by the
petitioner Bank to change not only the theory of its case but the basis of his cause of action.
It is well-settled that a party cannot change his theory on appeal, as this would in effect
deprive the other party of his day in court.
3.NEGOTIABLE INSTRUMENTS LAW; CHECKS; MUST BE DELIVERED TO THE PAYEE TO GIVE
EFFECT THERETO. A negotiable instrument, of which a check is, is not only a written
evidence of a contract right but is also a species of property. Just as a deed to a piece of land
must be delivered in order to convey title to the grantee, so must a negotiable instrument
be delivered to the payee in order to evidence its existence as a binding contract. Section 16
of the Negotiable Instruments Law, which governs checks, provides in part: "Every contract
on a negotiable instrument is incomplete and revocable until delivery of the instrument for
the purpose of giving effect thereto. . . ." The payee of a negotiable instrument acquires no
interest with respect thereto until its delivery to him. Delivery of an instrument means
transfer of possession, actual or constructive, from one person to another. Without the initial
delivery of the instrument from the drawer to the payee, there can be no liability on the
instrument. Moreover, such delivery must be intended to give effect to the instrument.

(2)To enforce payment of two checks executed by Sima Wei, payable to

petitioner, and drawn against the China Banking Corporation, to pay the
balance due on the promissory note.
Except for Lee Kian Huat, defendants filed their separate Motions to Dismiss
alleging a common ground that the complaint states no cause of action. The trial court
granted the defendants' Motions to Dismiss. The Court of Appeals affirmed this
decision, * to which the petitioner Bank, represented by its Legal Liquidator, filed this
Petition for Review by Certiorari, assigning the following as the alleged errors of the
Court of Appeals. 1
(1)THE COURT OF APPEALS ERRED IN HOLDING THAT THE PLAINTIFFPETITIONER HAS NO CAUSE OF ACTION AGAINST DEFENDANTSRESPONDENTS HEREIN. LibLex
(2)THE COURT OF APPEALS ERRED IN HOLDING THAT SECTION 13, RULE
3 OF THE REVISED RULES OF COURT ON ALTERNATIVE DEFENDANTS IS
NOT APPLICABLE TO HEREIN DEFENDANTS-RESPONDENTS.
The antecedent facts of this case are as follows:
In consideration for a loan extended by petitioner Bank to respondent Sima
Wei, the latter executed and delivered to the former a promissory note, engaging to pay
the petitioner Bank or order the amount of P1,820,000.00 on or before June 24, 1983
with interest at 32% per annum. Sima Wei made partial payments on the note, leaving a
balance of P1,032,450.02. On November 18, 1983, Sima Wei issued two crossed checks
payable to petitioner Bank drawn against China Banking Corporation, bearing
respectively the serial numbers 384934, for the amount of P550,000.00 and 384935, for
the amount of P500,000.00. The said checks were allegedly issued in full settlement of
the drawer's account evidenced by the promissory note. These two checks were not
delivered to the petitioner-payee or to any of its authorized representatives. For reasons
not shown, these checks came into the possession of respondent Lee Kian Huat, who
deposited the checks without the petitioner-payee's indorsement (forged or otherwise)
to the account of respondent Plastic Corporation, at the Balintawak branch, Caloocan
City, of the Producers Bank. Cheng Uy, Branch Manager of the Balintawak Branch of
Producers Bank, relying on the assurance of respondent Samson Tung, President of
Plastic Corporation, that the transaction was legal and regular, instructed the cashier of
Producers Bank to accept the checks for deposit and to credit them to the account of

said Plastic Corporation, inspite of the fact that the checks were crossed and payable to
petitioner Bank and bore no indorsement of the latter. Hence, petitioner filed the
complaint as aforestated.
The main issue before Us is whether petitioner Bank has a cause of action
against any or all of the defendants, in the alternative or otherwise.
A cause of action is defined as an act or omission of one party in violation of
the legal right or rights of another. The essential elements are: (1) legal right of the
plaintiff; (2) correlative obligation of the defendant; and (3) an act or omission of the
defendant in violation of said legal right. 2
The normal parties to a check are the drawer, the payee and the drawee bank.
Courts have long recognized the business custom of using printed checks where blanks
are provided for the date of issuance, the name of the payee, the amount payable and
the drawer's signature. All the drawer has to do when he wishes to issue a check is to
properly fill up the blanks and sign it. However, the mere fact that he has done these
does not give rise to any liability on his part, until and unless the check is delivered to
the payee or his representative. A negotiable instrument, of which a check is, is not only
a written evidence of a contract right but is also a species of property. Just as a deed to
a piece of land must be delivered in order to convey title to the grantee, so must a
negotiable instrument be delivered to the payee in order to evidence its existence as a
binding contract. Section 16 of the Negotiable Instruments Law, which governs checks,
provides in part:
"Every contract on a negotiable instrument is incomplete and
revocable until delivery of the instrument for the purpose of giving effect
thereto. . . ."
Thus, the payee of a negotiable instrument acquires no interest with respect
thereto until its delivery to him. 3 Delivery of an instrument means transfer of
possession, actual or constructive, from one person to another. 4 Without the initial
delivery of the instrument from the drawer to the payee, there can be no liability on the
instrument. Moreover, such delivery must be intended to give effect to the
instrument. LexLib
The allegations of the petitioner in the original complaint show that the two (2)
China Bank checks, numbered 384934 and 384935, were not delivered to the payee,
the petitioner herein. Without the delivery of said checks to petitioner-payee, the former
did not acquire any right or interest therein and cannot therefore assert any cause of
action, founded on said checks, whether against the drawer Sima Wei or against the
Producers Bank or any of the other respondents.
In the original complaint, petitioner Bank, as plaintiff, sued respondent Sima
Wei on the promissory note, and the alternative defendants, including Sima Wei, on the
two checks. On appeal from the orders of dismissal of the Regional Trial Court, petitioner
Bank alleged that its cause of action was not based on collecting the sum of money
evidenced by the negotiable instruments stated but on quasi- delict a claim for
damages on the ground of fraudulent acts and evident bad faith of the alternative
respondents. This was clearly an attempt by the petitioner Bank to change not only the
theory of its case but the basis of his cause of action. It is well-settled that a party
cannot change his theory on appeal, as this would in effect deprive the other party of
his day in court. 5

Notwithstanding the above, it does not necessarily follow that the drawer Sima
Wei is freed from liability to petitioner Bank under the loan evidenced by the promissory
note agreed to by her. Her allegation that she has paid the balance of her loan with the
two checks payable to petitioner Bank has no merit for, as We have earlier explained,
these checks were never delivered to petitioner Bank. And even granting, without
admitting, that there was delivery to petitioner Bank, the delivery of checks in payment
of an obligation does not constitute payment unless they are cashed or their value is
impaired through the fault of the creditor. 6 None of these exceptions were alleged by
respondent Sima Wei.
Therefore, unless respondent Sima Wei proves that she has been relieved from
liability on the promissory note by some other cause, petitioner Bank has a right of
action against her for the balance due thereon.

However, insofar as the other respondents are concerned, petitioner Bank has
no privity with them. Since petitioner Bank never received the checks on which it based
its action against said respondents, it never owned them (the checks) nor did it acquire
any interest therein. Thus, anything which the respondents may have done with respect
to said checks could not have prejudiced petitioner Bank. It had no right or interest in
the checks which could have been violated by said respondents. Petitioner Bank has
therefore no cause of action against said respondents, in the alternative or otherwise. If
at all, it is Sima Wei, the drawer, who would have a cause of action against her corespondents, if the allegations in the complaint are found to be true.
With respect to the second assignment of error raised by petitioner Bank
regarding the applicability of Section 13, Rule 3 of the Rules of Court, We find it
unnecessary to discuss the same in view of Our finding that the petitioner Bank did not
acquire any right or interest in the checks due to lack of delivery. It therefore has no
cause of action against the respondents, in the alternative or otherwise.
In the light of the foregoing, the judgment of the Court of Appeals dismissing
the petitioner's complaint is AFFIRMED insofar as the second cause of action is
concerned. On the first cause of action, the case is REMANDED to the trial court for a
trial on the merits, consistent with this decision, in order to determine whether
respondent Sima Wei is liable to the Development Bank of Rizal for any amount under
the promissory note allegedly signed by her. cdphil
SO ORDERED.