Violago v. BA Finance - Villanueva v. Nite

8/10/2019 Violago v. BA Finance - Villanueva v. Nite

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Violago v. BA FinanceVELASCO, JR.,J.:

This is a Petition for Review on Certiorari of the August 20, 2002Decision[1]and May 15, 2003 Resolution [2]of the Court of Appeals (CA) in CA-G.R. CVNo. 48489 entitled BA Finance Corporation, Plaintiff-Appellee v. Sps. Pedro and FlorenciaViolago, Defendants and Third Party Plaintiffs-Appellants v. Avelino Violago, Third PartyDefendant-Appellant. Petitioners-spouses Pedro and Florencia Violago pray for thereversal of the appellate courts ruling which held them liable to respondent BA FinanceCorporation (BA Finance) under a promissory note and a chattel mortgage. Petitionerslikewise pray that respondent Avelino Violago be adjudged directly liable to BAFinance.

The Facts

Sometime in 1983, Avelino Violago, President of Violago Motor SalesCorporation (VMSC), offered to sell a car to his cousin, Pedro F. Violago, and thelatters wife, Florencia. Avelino explained that he needed to sell a vehicle to increase thesales quota of VMSC, and that the spouses would just have to pay a down payment ofPhP 60,500 while the balance would be financed by respondent BA Finance. Thespouses would pay the monthly installments to BA Finance while Avelino would take

care of the documentation and approval of financing of the car. Under these terms, thespouses then agreed to purchase a Toyota Cressida Model 1983 from VMSC.[3]

On August 4, 1983, the spouses and Avelino signed a promissory note underwhich they bound themselves to pay jointly and severally to the order of VMSC theamount of PhP 209,601 in 36 monthly installments of PhP 5,822.25 a month, the firstinstallment to be due and payable onSeptember 16, 1983. Avelino prepared a DisclosureStatement of Loan/Credit Transportation which showed the net purchase price of the

vehicle, down payment, balance, and finance charges. VMSC then issued a sales invoicein favor of the spouses with a detailed description of the Toyota Cressida car. In turn,the spouses executed a chattel mortgage over the car in favor of VMSC as security forthe amount of PhP 209,601. VMSC, through Avelino, endorsed the promissory note to

BA Financewithoutrecourse . After receiving the amount of PhP 209,601, VMSCexecuted a Deed of Assignment of its rights and interests under the promissory noteand chattel mortgage in favor of BA Finance. Meanwhile, the spouses remitted theamount of PhP 60,500 to VMSC through Avelino.[4]

The sales invoice was filed with the Land Transportation Office (LTO)-Baliwag Branch, which issued Certificate of Registration No. 0137032 in the name of

Pedro on August 8, 1983. The spouses were unaware that the same car had alreadybeen sold in 1982 to Esmeraldo Violago, another cousin of Avelino, and registered inEsmeraldos name by the LTO-San Rafael Branch. Despite the spouses demand forthe car and Avelinos repeated assurances, there was no delivery of the vehicle . Since

VMSC failed to deliver the car, Pedro did not pay any monthly amortization to BAFinance.[5]

On March 1, 1984, BA Finance filed with the Regional Trial Court (RTC),Branch 116 in Pasay City a complaint for Replevin with Damages against thespouses. The complaint, docketed as Civil Case No. 1628-P, prayed for the delivery ofthe vehicle in favor of BA Finance or, if delivery cannot be effected, for the payment ofPhP 199,049.41 plus penalty at the rate of 3% per month from February 15, 1984 untilfully paid. BA Finance also asked for the payment of attorneys fees, liquidateddamages, replevin bond premium, expenses in the seizure of the vehicle, and costs ofsuit. The RTC issued an Order of Replevin on March 28, 1984. The Violago spouses,as defendants a quo, were declared in default for failing to file an answer. Eventually, theRTC rendered on December 3, 1984 a decision in favor of BA Finance. A writ ofexecution was thereafter issued on January 11, 1985, followed by an alias writ ofexecution.[6]

In the meantime, Esmeraldo conveyed the vehicle to Jose V. Olvido who was

then issued Certificate of Registration No. 0014830-4 by the LTO-Cebu City Branchon April 29, 1985. On May 8, 1987, Jose executed a Chattel Mortgage over the vehiclein favor of Generoso Lopez as security for a loan covered by a promissory note in theamount of PhP 260,664. This promissory note was later endorsed to BAFinance, CebuCity branch.[7]

On August 21, 1989, the spouses Violago filed a Motion for Reconsiderationand Motion to Quash Writ of Execution on the basis of lack of a valid service ofsummons on them, among other reasons. The RTC denied the motions; hence, thespouses filed a petition for certiorari under Rule 65 before the CA, docketed as CA G.R.No. 2002-SP. On May 31, 1991, the CA nullified the RTCs order. This CA decisionbecame final and executory.

On January 28, 1992, the spouses filed their Answer before the RTC, allegingthe following: they never received the vehicle from VMSC; the vehicle was previouslysold to Esmeraldo; BA Finance was not a holder in due course under Section 59 oftheNegotiable Instruments Law(NIL); and the recourse of BA Finance should be against

VMSC. On February 25, 1995, the Violago spouses, with prior leave of court, filed aThird Party Complaint against Avelino praying that he be held l iable to them in theevent that they be held liable to BA Finance, as well as for damages. VMSC was not
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impleaded as third party defendant. In his Motion to Dismiss and Answer, Avelinocontended that he was not a party to the transaction personally, but VMSC. Avelinosmotion was denied and the third party complaint against him was entertained by the trialcourt. Subsequently, the spouses belabored to prove that they affixed their signatures onthe promissory note and chattel mortgage in favor of VMSC in blank.[8]

The RTC rendered a Decision on March 5, 1994, finding for BA Finance butagainst the Violago spouses. The RTC, however, declared that they are entitled to beindemnified by Avelino. The dispositive portion of the RTCs decision reads:

WHEREFORE, defendant-[third]-party plaintiffs spousesPedro F. Violago and Florencia R. Violago are ordered to deliver toplaintiff BA Finance Corporation, at its principal office the BAFCBuilding, Gamboa St., Legaspi Village, Makati, Metro Manila the

Toyota Cressida car, model 1983, bearing Engine No. 21R-02854117,and with Serial No. RX60-804614, covered by the deed of chattelmortgage dated August 4, 1983; or if such delivery cannot be made,to pay, jointly and severally, to the plaintiff the sum of P198,003.06together with the penalty [thereon] at three percent (3%) a month,from March 1, 1984, until the amount is fully paid.

In either case, the defendant-third-party plaintiffs arerequired to pay, jointly and severally, to the plaintiff a sum equivalentto twenty-five percent (25%) of P198,003.06 as attorneys fees, andanother amount also equivalent to twenty five percent (25%) of thesaid unpaid balance, as liquidated damages. The defendant-thirdparty-plaintiffs are also required to shoulder the litigation expensesand costs.

As indemnification, third-party defendant Avelino Violago isordered to deliver to defendants-third-party plaintiffs spouses PedroF. Violago and Florencia R. Violago the aforedescribed motor

vehicle; or if such delivery is not possible, to pay to the said spouses

the sum of P198,003.06, together with the penalty thereon at three(3%) a month from March 1, 1984, until the amount is entirely paid.

In either case, the third-party defendant should pay to thedefendant-third-party plaintiffs spouses a sum equivalent to twenty-five percent (25%) of P198,003.06 as attorneys fees, and anothersum equivalent also to twenty-five percent (25%) of the said unpaidbalance, as liquidated damages.

Third-party defendant Avelino Violago is further ordered toreturn to the third-party plaintiffs the sum of P60,500.00 they paid tohim as down payment for the car; and to pay them P15,000.00 asmoral damages; P10,000.00 as exemplary damages; and reimbursethem for all the expenses and costs of the suit.

The counterclaims of the defendants and third-partydefendant, for lack of merit, are dismissed.[9]

The Ruling of the CA

Petitioners-spouses and Avelino appealed to the CA. The spouses argued thatthe promissory note is a negotiable instrument; hence, the trial court should haveapplied the NIL and not the Civil Code. The spouses also asserted that since VMSC

was not the owner of the vehicle at the time of sale, the sale was null and void for thefailure in the cause or consideration of the promissory note, which in this case wasthe sale and delivery of the vehicle. The spouses also alleged that BA Finance was not aholder in due course of the note since it knew, through its Cebu City branch, that thecar was never delivered to the spouses.[10] On the other hand, Avelino prayed for thedismissal of the complaint against him because he was not a party to the transaction,

and for an order to the spouses to pay him moral damages and costs of suit.

The appellate court ruled that the promissory note was a negotiable instrumentand that BA Finance was a holder in due course, applying Secs. 8, 24, and 52 of theNIL. The CA faulted petitioners for failing to implead VMSC, the seller of the vehicleand creditor in the promissory note, as a party in their Third PartyComplaint. Citing Salas v. Court of Appeals,[11] the appellate court reasoned that since

VMSC is an indispensable party, any judgment will not bind it or be enforced againstit. The absence of VMSC rendered the proceedings in the RTC and the judgment in the

Third Party Complaint null and void, not only as to the absent party but also to thepresent parties, namely the Defendants-Appellants (petitioners herein) and the Third-Party-Defendant-Appellant (Avelino Violago).The CA set aside the trial courts order

holding Avelino liable for damages to the spouses without prejudice to the action of thespouses against VMSC and Avelino in a separate action.[12]

The dispositive portion of the August 20, 2002 CA Decision reads:

IN THE LIGHT OF ALL THE FOREGOING, theappeal of the Plaintiffs-Appellants is DISMISSED. The appeal ofthe Third-Party-Defendant-Appellant is GRANTED. The Decision
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of the Court a quo isAFFIRMED, with the modification that theThird-Party Complaint against the Third-Party-Defendant-appellantis DISMISSED, without prejudice. The counterclaims of the Third-Party Defendant Appellant against the Defendants-Appellantsare DISMISSED, also without prejudice.[13]

The spouses Violago sought but were denied reconsideration by the CA per itsResolution of May 15, 2003.

The Issues

Petitioners raise the following issues:

WHETHER OR NOT THE HOLDER OF AN INVALIDNEGOTIABLE PROMISSORY NOTE MAY BE CONSIDERED

A HOLDER IN DUE COURSE

WHETHER OR NOT A CHATTEL MORTGAGE SHOULD BECONSIDERED VALID DESPITE VITIATION OF CONSENTOF, AND THE FRAUD COMMITTED ON, THE

MORTGAGORS BY AVELINO, AND THE CLEAR ABSENCEOF OBJECT CERTAIN

WHETHER OR NOT THE VEIL OF CORPORATE ENTITYMAY BE INVOKED AND SUSTAINED DESPITE THEFRAUD AND DECEPTION OF AVELINO

The Courts Ruling

The ruling of the appellate court is set aside insofar as it dismissed, withoutprejudice, the third party complaint of petitioners against Avelino thereby effectively

absolving Avelino from any liability under the third party complaint.

In addressing the threshold issue of whether BA Finance is a holder in duecourse of the promissory note, we must determine whether the note is a negotiableinstrument and, hence, covered by the NIL. In their appeal to the CA, petitionersargued that the promissory note is a negotiable instrument and that the provisions ofthe NIL, not the Civil Code, should be applied. In the present petition, however,petitioners claim that Article 1318 of the Civil Code[14]should be applied since their

consent was vitiated by fraud, and, thus, the promissory note does not carry any legaleffect despite its negotiation. Either way, the petitioners arguments deserve no merit.

The promissory note is clearly negotiable. The appellate court was correct infinding all the requisites of a negotiable instrument present. The NIL provides:

Section 1. Form of Negotiable Instruments. An instrument to benegotiable must conform to the following requirements:

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

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

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

be named or otherwise indicated therein with reasonable certainty.

The promissory note signed by petitioners reads:

209,601.00 Makati, Metro Manila, Philippines, August 4,

1983

For value received, I/we, jointly and severally, promise to pay tothe order of VIOLAGO MOTOR SALES CORPORATION, itsoffice, the principal sum of TWO HUNDRED NINE THOUSANDSIX HUNDRED ONE ONLY Pesos (P209,601.00), PhilippinesCurrency, with interest at the rate stipulated herein below, ininstallments as follows:

Thirty Six (36) successive monthly installments of P5,822.25, thefirst installment to be paid on 9-16-83, and the succeeding monthlyinstallments on the 16th day of each and every succeeding month

thereafter until the account is fully paid, provided that the penaltycharge of three (3%) per cent per month or a fraction thereof shall beadded on each unpaid installment from maturity thereof until fullypaid.

x x x x
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Notice of demand, presentment, dishonor and protest are herebywaived.

(Sgd.) (Sgd.)PEDRO F. VIOLAGO FLORENCIA R.

VIOLAGO

763 Constancia St., Sampaloc, Manila same

(Address) (Address)

(Sgd.) (Sgd.)Marivic Avaria Jesus Tuazon(WITNESS) (WITNESS)

PAY TO THE ORDER OF BA FINANCE CORPORATIONWITHOUT RECOURSE

VIOLAGO MOTOR SALES CORPORATIONBy: (Sgd.)AVELINO A. VIOLAGO, Pres.[15]

The promissory note clearly satisfies the requirements of a negotiableinstrument under the NIL. It is in writing; signed by the Violago spouses; has anunconditional promise to pay a certain amount, i.e., PhP 209,601, on specific dates inthe future which could be determined from the terms of the note; made payable to theorder of VMSC; and names the drawees with certainty. The indorsement by VMSC toBA Finance appears likewise to be valid and regular.

The more important issue now is whether or not BA Finance is a holder in duecourse. The resolution of this issue will determine whether petitioners defense of fraudand nullity of the sale could validly be raised against respondent corporation. Sec. 52 of

the NIL provides:

Section 52. What constitutes a holder in due course.A holder indue course is a holder who has taken the instrument under thefollowing conditions:

(a) That it is complete and regular upon its face;

(b) That he became the holder of it before it was overdue, andwithout notice that it had been previously dishonored, if such was thefact;

(c) That he took it in good faith and for value;(d) That at the time it was negotiated to him he had no notice

of any infirmity in the instrument or defect in the title of the personnegotiating it.

The law presumes that a holder of a negotiable instrument is a holder

thereof in due course.[16] In this case, the CA is correct in finding that BA Financemeets all the foregoing requisites:

In the present recourse, on its face, (a) the PromissoryNote,Exhibit A, is complete and regular; (b) the PromissoryNote was endorsed by the VMSC in favor of the Appellee; (c) the

Appellee, when it accepted the Note, acted in good faith and forvalue; (d) the Appellee was never informed, before and at the timethe Promissory Note was endorsed to the Appellee, that the

vehicle sold to the Defendants-Appellants was not delivered to thelatter and that VMSC had already previously sold the vehicle toEsmeraldo Violago. Although Jose Olvido mortgaged the vehicle toGeneroso Lopez, who assigned his rights to the BA Finance

Corporation (Cebu Branch), the same occurred only on May 8, 1987,much later than August 4, 1983, when VMSC assigned its rights overthe Chattel Mortgage by the Defendants-Appellants to the

Appellee. Hence, Appellee was a holder in due course.[17]

In the hands of one other than a holder in due course, a negotiable instrumentis subject to the same defenses as if it were non-negotiable .[18]A holder in due course,however, holds the instrument free from any defect of title of prior parties and fromdefenses available to prior parties among themselves, and may enforce payment of theinstrument for the full amount thereof.[19] Since BA Finance is a holder in due course,petitioners cannot raise the defense of non-delivery of the object and nullity of the saleagainst the corporation. The NIL considers every negotiable instrumentprima facieto

have been issued for a valuable consideration.[20]

In Salas,we held that a party holdingan instrument may enforce payment of the instrument for the full amount thereof. Assuch, the maker cannot set up the defense of nullity of the contract of sale.[21]Thus,petitioners are liable to respondent corporation for the payment of the amount stated inthe instrument.

From the third party complaint to the present petition, however, petitionerspray that the veil of corporate fiction be set aside and Avelino be adjudged directly liable
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to BA Finance. Petitioners likewise pray for damages for the fraud committed uponthem.

In Concept Builders, Inc. v. NLRC, we held:It is a fundamental principle of corporation law that a

corporation is an entity separate and distinct from its stockholdersand from other corporations to which it may be connected. But, thisseparate and distinct personality of a corporation is merely a fictioncreated by law for convenience and to promote justice. So, when thenotion of separate juridical personality is used to defeat public

convenience, justify wrong, protect fraud or defend crime, or is usedas a device to defeat the labor laws, this separate personality of thecorporation may be disregarded or the veil of corporate fictionpierced. This is true likewise when the corporation is merely anadjunct, a business conduit or an alter ego of another corporation.

x x x x

The test in determining the applicability of the doctrine ofpiercing the veil of corporate fiction is as follows:

1. Control, not mere majority or complete stock control, but

complete domination, not only of finances but of policy andbusiness practice in respect to the transaction attacked so thatthe corporate entity as to this transaction had at the time noseparate mind, will or existence of its own;

2. Such control must have been used by the defendant to commitfraud or wrong, to perpetuate the violation of a statutory orother positive legal duty, or dishonest and unjust acts incontravention of plaintiffs legal rights; and

3. The aforesaid control and breach of duty must proximatelycause the injury or unjust loss complained of.[22]

This case meets the foregoing test. VMSC is a family-owned corporation of

which Avelino was president. Avelino committed fraud in selling the vehicle topetitioners, a vehicle that was previously sold to Avelinos other cousin,Esmeraldo. Nowhere in the pleadings did Avelino refute the fact that the vehicle in thiscase was already previously sold to Esmeraldo; he merely insisted that he cannot be heldliable because he was not a party to the transaction. The fact that Avelino and Pedroare cousins, and that Avelino claimed to have a need to increase the sales quota, waslikely among the factors which motivated the spouses to buy the car. Avelino, knowingfully well that the vehicle was already sold, and with abuse of his relationship with the

spouses, still proceeded with the sale and collected the down payment frompetitioners. The trial court found that the vehicle was not delivered to the spouses.

Avelino clearly defrauded petitioners. His actions were the proximate cause ofpetitioners loss. He cannot now hide behind the separate corporate personality of

VMSC to escape from liability for the amount adjudged by the trial court in favor ofpetitioners.

The fact that VMSC was not included as defendant in petitioners third partycomplaint does not preclude recovery by petitioners from Avelino; neither would such

non-inclusion constitute a bar to the application of the piercing-of-the-corporate-veildoctrine. We suggested as much inArcilla v. Court of Appeals, an appellate proceedinginvolving petitioner Arcillas bid to avoid the adverse CA decision on the argument thathe is not personally liable for the amount adjudged since the same constitutes acorporate liability which nevertheless cannot even be enforced against the corporation

which has not been impleaded as a party below. In that case, the Court found as well-taken the CAs act of disregarding the separate juridical personality of the corporationand holding its president, Arcilla, liable for the obligations incurred in the name of thecorporation although it was not a party to the collection suit before the trial court. Anexcerpt fromArcilla:

x x x In short, even if We are to assume arguendo that the

obligation was incurred in the name of the corporation, the petitioner[Arcilla] would still be personally liable therefor because for all legalintents and purposes, he and the corporation are one and the same.Csar Marine Resources, Inc. is nothing more than his businessconduit and alter ego. The fiction of separate juridical personalityconferred upon such corporation by law should be disregarded.Significantly, petitioner does not seriously challenge the [CAs]application of the doctrine which permits the piercing of thecorporate veil and the disregarding of the fiction of a separatejuridical personality; this is because he knows only too well that fromthe beginning, he merely used the corporation for his personalpurposes.[23]

WHEREFORE, the CAsAugust 20, 2002 Decision and May 15,2003 Resolution in CA-G.R. CV No. 48489 are SET ASIDE insofar as they dismissed

without prejudice the third party complaint of petitioners-spouses Pedro and FlorenciaViolago against respondent Avelino Violago. The March 5, 1994 Decision of the RTCis REINSTATED andAFFIRMED. Costs against Avelino Violago.

SO ORDERED.
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G.R. No. 74886 December 8, 1992

PRUDENTIAL BANK, petitioner,vs.INTERMEDIATE APPELLATE COURT, PHILIPPINE RAYON MILLS,INC. and ANACLETO R. CHI, respondents.

DAVIDE, JR.,J.:

Petitioner seeks to review and set aside the decision 1of public respondent; IntermediateAppellate Court (now Court of Appeals), dated 10 March 1986, in AC-G.R. No. 66733which affirmed in totothe 15 June 1978 decision of Branch 9 (Quezon City) of the thenCourt of First Instance (now Regional Trial Court) of Rizal in Civil Case No. Q-19312.

The latter involved an action instituted by the petitioner for the recovery of a sum ofmoney representing the amount paid by it to the Nissho Company Ltd. of Japan fortextile machinery imported by the defendant, now private respondent, Philippine RayonMills, Inc. (hereinafter Philippine Rayon), represented by co-defendant Anacleto R. Chi.

The facts which gave rise to the instant controversy are summarized by the publicrespondent as follows:

On August 8, 1962, defendant-appellant Philippine Rayon Mills, Inc.entered into a contract with Nissho Co., Ltd. of Japan for theimportation of textile machineries under a five-year deferred paymentplan (Exhibit B, Plaintiff's Folder of Exhibits, p 2). To effectpayment for said machineries, the defendant-appellant applied for acommercial letter of credit with the Prudential Bank and TrustCompany in favor of Nissho. By virtue of said application, thePrudential Bank opened Letter of Credit No. DPP-63762 for

$128,548.78 (Exhibit A, Ibid., p. 1). Against this letter of credit, draftswere drawn and issued by Nissho (Exhibits X, X-1 to X-11, Ibid., pp.65, 66 to 76), which were all paid by the Prudential Bank through itscorrespondent in Japan, the Bank of Tokyo, Ltd. As indicated ontheir faces, two of these drafts (Exhibit X and X-1, Ibid., pp. 65-66)

were accepted by the defendant-appellant through its president,

Anacleto R. Chi, while the others were not (Exhibits X-2 to X-11,Ibid., pp. 66 to 76).

Upon the arrival of the machineries, the Prudential Bank indorsed theshipping documents to the defendant-appellant which accepteddelivery of the same. To enable the defendant-appellant to takedelivery of the machineries, it executed, by prior arrangement withthe Prudential Bank, a trust receipt which was signed by Anacleto R.Chi in his capacity as President (sic) of defendant-appellant company(Exhibit C, Ibid., p. 13).

At the back of the trust receipt is a printed form to be accomplishedby two sureties who, by the very terms and conditions thereof, wereto be jointly and severally liable to the Prudential Bank should thedefendant-appellant fail to pay the total amount or any portion of thedrafts issued by Nissho and paid for by Prudential Bank. Thedefendant-appellant was able to take delivery of the textilemachineries and installed the same at its factory site at 69 ObudanStreet, Quezon City.

Sometime in 1967, the defendant-appellant ceased business operation(sic). On December 29, 1969, defendant-appellant's factory was leasedby Yupangco Cotton Mills for an annual rental of P200,000.00(Exhibit I, Ibid., p. 22). The lease was renewed on January 3, 1973(Exhibit J, Ibid., p. 26). On January 5, 1974, all the textile machineriesin the defendant-appellant's factory were sold to AIC DevelopmentCorporation for P300,000.00 (Exhibit K, Ibid., p. 29).

The obligation of the defendant-appellant arising from the letter ofcredit and the trust receipt remained unpaid and unliquidated.Repeated formal demands (Exhibits U, V, and W, Ibid., pp. 62, 63,64) for the payment of the said trust receipt yielded no result Hence,the present action for the collection of the principal amount ofP956,384.95 was filed on October 3, 1974 against the defendant-appellant and Anacleto R. Chi. In their respective answers, thedefendants interposed identical special defenses, viz., the complaintstates no cause of action; if there is, the same has prescribed; and theplaintiff is guilty of laches. 2


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On 15 June 1978, the trial court rendered its decision the dispositive portion of whichreads:

WHEREFORE, judgment is hereby rendered sentencing thedefendant Philippine Rayon Mills, Inc. to pay plaintiff the sum ofP153,645.22, the amounts due under Exhibits "X" & "X-1", withinterest at 6% per annum beginning September 15, 1974 until fullypaid.

Insofar as the amounts involved in drafts Exhs. "X" (sic) to "X-11",inclusive, the same not having been accepted by defendant PhilippineRayon Mills, Inc., plaintiff's cause of action thereon has not accrued,hence, the instant case is premature.

Insofar as defendant Anacleto R. Chi is concerned, the case isdismissed. Plaintiff is ordered to pay defendant Anacleto R. Chi thesum of P20,000.00 as attorney's fees.

With costs against defendant Philippine Rayon Mills, Inc.

SO ORDERED. 3

Petitioner appealed the decision to the then Intermediate Appellate Court. In urging thesaid court to reverse or modify the decision, petitioner alleged in its Brief that the trialcourt erred in (a) disregarding its right to reimbursement from the private respondentsfor the entire unpaid balance of the imported machines, the total amount of which waspaid to the Nissho Company Ltd., thereby violating the principle of the third partypayor's right to reimbursement provided for in the second paragraph of Article 1236 ofthe Civil Code and under the rule against unjust enrichment; (b) refusing to hold

Anacleto R. Chi, as the responsible officer of defendant corporation, liable underSection 13 of P.D No 115 for the entire unpaid balance of the imported machinescovered by the bank's trust receipt (Exhibit "C"); (c) finding that the solidary guaranty

clause signed by Anacleto R. Chi is not a guaranty at all; (d) controverting the judicialadmissions of Anacleto R. Chi that he is at least a simple guarantor of the said trustreceipt obligation; (e) contravening, based on the assumption that Chi is a simpleguarantor, Articles 2059, 2060 and 2062 of the Civil Code and the related evidence andjurisprudence which provide that such liability had already attached; (f) contravening thejudicial admissions of Philippine Rayon with respect to its liability to pay the petitionerthe amounts involved in the drafts (Exhibits "X", "X-l" to "X-11''); and (g) interpreting

"sight" drafts as requiring acceptance by Philippine Rayon before the latter could beheld liable thereon. 4

In its decision, public respondent sustained the trial court in all respects. As to the firstand last assigned errors, it ruled that the provision on unjust enrichment, Article 2142 ofthe Civil Code, applies only if there is no express contract between the parties and thereis a clear showing that the payment is justified. In the instant case, the relationshipexisting between the petitioner and Philippine Rayon is governed by specific contracts,namely the application for letters of credit, the promissory note, the drafts and the trustreceipt. With respect to the last ten (10) drafts (Exhibits "X-2" to "X-11") which hadnot been presented to and were not accepted by Philippine Rayon, petitioner was notjustified in unilaterally paying the amounts stated therein. The public respondent did notagree with the petitioner's claim that the drafts were sight drafts which did not requirepresentment for acceptance to Philippine Rayon because paragraph 8 of the trust receiptpresupposes prior acceptance of the drafts. Since the ten (10) drafts were not presentedand accepted, no valid demand for payment can be made.

Public respondent also disagreed with the petitioner's contention that privaterespondent Chi is solidarily liable with Philippine Rayon pursuant to Section 13 of P.D.No. 115 and based on his signature on the solidary guaranty clause at the dorsal side ofthe trust receipt. As to the first contention, the public respondent ruled that the civilliability provided for in said Section 13 attaches only after conviction. As to the second,it expressed misgivings as to whether Chi's signature on the trust receipt made the latterautomatically liable thereon because the so-called solidary guaranty clause at the dorsalportion of the trust receipt is to be signed not by one (1) person alone, but by two (2)persons; the last sentence of the same is incomplete and unsigned by witnesses; and it isnot acknowledged before a notary public. Besides, even granting that it was executedand acknowledged before a notary public, Chi cannot be held liable therefor because therecords fail to show that petitioner had either exhausted the properties of PhilippineRayon or had resorted to all legal remedies as required in Article 2058 of the Civil Code.

As provided for under Articles 2052 and 2054 of the Civil Code, the obligation of aguarantor is merely accessory and subsidiary, respectively. Chi's liability would thereforearise only when the principal debtor fails to comply with his obligation. 5

Its motion to reconsider the decision having been denied by the public respondent in itsResolution of 11 June 1986, 6petitioner filed the instant petition on 31 July 1986submitting the following legal issues:

I. WHETHER OR NOT THE RESPONDENT APPELLATECOURT GRIEVOUSLY ERRED IN DENYING PETITIONER'S


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CLAIM FOR FULL REIMBURSEMENT AGAINST THEPRIVATE RESPONDENTS FOR THE PAYMENTPETITIONER MADE TO NISSHO CO. LTD. FOR THEBENEFIT OF PRIVATE RESPONDENT UNDER ART. 1283OF THE NEW CIVIL CODE OF THE PHILIPPINES ANDUNDER THE GENERAL PRINCIPLE AGAINST UNJUSTENRICHMENT;

II. WHETHER OR NOT RESPONDENT CHI IS SOLIDARILYLIABLE UNDER THE TRUST RECEIPT (EXH. C);

III. WHETHER OR NOT ON THE BASIS OF THE JUDICIALADMISSIONS OF RESPONDENT CHI HE IS LIABLETHEREON AND TO WHAT EXTENT;

IV. WHETHER OR NOT RESPONDENT CHI IS MERELY ASIMPLE GUARANTOR; AND IF SO; HAS HIS LIABILITY ASSUCH ALREADY ATTACHED;

V. WHETHER OR NOT AS THE SIGNATORY AND

RESPONSIBLE OFFICER OF RESPONDENT PHIL. RAYONRESPONDENT CHI IS PERSONALLY LIABLE PURSUANTTO THE PROVISION OF SECTION 13, P.D. 115;

VI. WHETHER OR NOT RESPONDENT PHIL. RAYON ISLIABLE TO THE PETITIONER UNDER THE TRUSTRECEIPT (EXH. C);

VII. WHETHER OR NOT ON THE BASIS OF THE JUDICIALADMISSIONS RESPONDENT PHIL. RAYON IS LIABLE TOTHE PETITIONER UNDER THE DRAFTS (EXHS. X, X-1 TOX-11) AND TO WHAT EXTENT;

VIII. WHETHER OR NOT SIGHT DRAFTS REQUIRE PRIORACCEPTANCE FROM RESPONDENT PHIL. RAYONBEFORE THE LATTER BECOMES LIABLE TOPETITIONER. 7

In the Resolution of 12 March 1990, 8 this Court gave due course to the petition afterthe filing of the Comment thereto by private respondent Anacleto Chi and of the Replyto the latter by the petitioner; both parties were also required to submit their respectivememoranda which they subsequently complied with.

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

1. Whether presentment for acceptance of the

drafts was indispensable to make Philippine Rayonliable thereon;

2. Whether Philippine Rayon is liable on the basisof the trust receipt;

3. Whether private respondent Chi is jointly andseverally liable with Philippine Rayon for theobligation sought to be enforced and if not,

whether he may be considered a guarantor; in thelatter situation, whether the case should have beendismissed on the ground of lack of cause of action

as there was no prior exhaustion of PhilippineRayon's properties.

Both the trial court and the public respondent ruled that Philippine Rayon could be heldliable for the two (2) drafts, Exhibits "X" and "X-1", because only these appear to havebeen accepted by the latter after due presentment. The liability for the remaining ten(10) drafts (Exhibits "X-2" to "X-11" inclusive) did not arise because the same were notpresented for acceptance. In short, both courts concluded that acceptance of the draftsby Philippine Rayon was indispensable to make the latter liable thereon. We are unableto agree with this proposition. The transaction in the case at bar stemmed fromPhilippine Rayon's application for a commercial letter of credit with the petitioner in theamount of $128,548.78 to cover the former's contract to purchase and import loom and

textile machinery from Nissho Company, Ltd. of Japan under a five-year deferredpayment plan. Petitioner approved the application. As correctly ruled by the trial courtin its Order of 6 March 1975: 9

. . . By virtue of said Application and Agreement for CommercialLetter of Credit, plaintiff bank 10was under obligation to pay throughits correspondent bank in Japan the drafts that Nisso (sic) Company,Ltd., periodically drew against said letter of credit from 1963 to 1968,


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pursuant to plaintiff's contract with the defendant Philippine RayonMills, Inc. In turn, defendant Philippine Rayon Mills, Inc., wasobligated to pay plaintiff bank the amounts of the drafts drawn byNisso (sic) Company, Ltd. against said plaintiff bank together with anyaccruing commercial charges, interest, etc. pursuant to the terms andconditions stipulated in the Application and Agreement ofCommercial Letter of Credit Annex "A".

A letter of credit is defined as an engagement by a bank or other person made at therequest of a customer that the issuer will honor drafts or other demands for paymentupon compliance with the conditions specified in the credit. 11Through a letter ofcredit, the bank merely substitutes its own promise to pay for one of its customers whoin return promises to pay the bank the amount of funds mentioned in the letter of creditplus credit or commitment fees mutually agreed upon. 12In the instant case then, thedrawee was necessarily the herein petitioner. It was to the latter that the drafts werepresented for payment. In fact, there was no need for acceptance as the issued drafts aresight drafts. Presentment for acceptance is necessary only in the cases expresslyprovided for in Section 143 of the Negotiable Instruments Law (NIL). 13The saidsection reads:

Sec. 143. When presentment for acceptance must be made.Presentment

for acceptance must be made:

(a) Where the bill is payableafter sight, or in any other case,

where presentment foracceptance is necessary in orderto fix the maturity of theinstrument; or

(b) Where the bill expresslystipulates that it shall bepresented for acceptance; or

(c) Where the bill is drawnpayable elsewhere than at theresidence or place of business ofthe drawee.

In no other case is presentment for acceptance necessary in order torender any party to the bill liable.

Obviously then, sight draftsdo not require presentment for acceptance.

The acceptance of a bill is the signification by the drawee of his assent to the order ofthe drawer; 14this may be done in writing by the drawee in the bill itself, or in a separateinstrument. 15

The parties herein agree, and the trial court explicitly ruled, that the subject, drafts aresight drafts. Said the latter:

. . . In the instant case the drafts being at sight, they are supposed tobe payable upon acceptance unless plaintiff bank has given thePhilippine Rayon Mills Inc. time within which to pay the same. Thefirst two drafts (Annexes C & D, Exh. X & X-1) were duly acceptedas indicated on their face (sic), and upon such acceptance should havebeen paid forthwith. These two drafts were not paid and althoughPhilippine Rayon Millsought to have paid the same, the fact remains that until now they are

still unpaid.16

Corollarily, they are, pursuant to Section 7 of the NIL, payable on demand. Section 7provides:

Sec. 7. When payable on demand.An instrument is payable ondemand

(a) When so it is expressed to bepayable on demand, or at sight,or on presentation; or

(b) In which no time forpayment in expressed.

Where an instrument is issued, accepted, or indorsed when overdue,it is, as regards the person so issuing, accepting, or indorsing it,payable on demand. (emphasis supplied)


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Paragraph 8 of the Trust Receipt which reads: "My/our liability for payment atmaturity of any accepted draft, bill of exchange or indebtedness shall not beextinguished or modified" 17does not, contrary to the holding of the publicrespondent, contemplate prior acceptance by Philippine Rayon, but by thepetitioner. Acceptance, however, was not even necessary in the first placebecause the drafts which were eventually issued were sight drafts And even ifthese were not sight drafts, thereby necessitating acceptance, it would be thepetitionerand not Philippine Rayonwhich had to accept the same forthe latter was not the drawee. Presentment for acceptance is defined an the

production of a bill of exchange to a drawee for acceptance. 18The trial courtand the public respondent, therefore, erred in ruling that presentment foracceptance was an indispensable requisite for Philippine Rayon's liability onthe drafts to attach. Contrary to both courts' pronouncements, PhilippineRayon immediately became liable thereon upon petitioner's payment thereof.Such is the essence of the letter of credit issued by the petitioner. A differentconclusion would violate the principle upon which commercial letters of creditare founded because in such a case, both the beneficiary and the issuer, NisshoCompany Ltd. and the petitioner, respectively, would be placed at the mercy ofPhilippine Rayon even if the latter had already received the importedmachinery and the petitioner had fully paid for it. The typical setting andpurpose of a letter of credit are described in Hibernia Bank and Trust

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

thus:

Commercial letters of credit have come into general use ininternational sales transactions where much time necessarily elapsesbetween the sale and the receipt by a purchaser of the merchandise,during which interval great price changes may occur. Buyers andsellers struggle for the advantage of position. The seller is desirous ofbeing paid as surely and as soon as possible, realizing that the vendeeat a distant point has it in his power to reject on trivial groundsmerchandise on arrival, and cause considerable hardship to theshipper. Letters of credit meet this condition by affording celerity andcertainty of payment. Their purpose is to insure to a seller payment of

a definite amount upon presentation of documents. The bank dealsonly with documents. It has nothing to do with the quality of themerchandise. Disputes as to the merchandise shipped may arise andbe litigated later between vendor and vendee, but they may notimpede acceptance of drafts and payment by the issuing bank whenthe proper documents are presented.

The trial court and the public respondent likewise erred in disregarding the trust receiptand in not holding that Philippine Rayon was liable thereon. In People vs.Yu ChaiHo, 20this Court explains the nature of a trust receipt by quoting In re Dunlap CarpetCo., 21thus:

By this arrangement a banker advances money to an intendingimporter, and thereby lends the aid of capital, of credit, or of businessfacilities and agencies abroad, to the enterprise of foreign commerce.Much of this trade could hardly be carried on by any other means,and therefore it is of the first importance that the fundamental factorin the transaction, the banker's advance of money and credit, shouldreceive the amplest protection. Accordingly, in order to secure thatthe banker shall be repaid at the critical point that is, when theimported goods finally reach the hands of the intended vendeethebanker takes the full title to the goods at the very beginning; he takesit as soon as the goods are bought and settled for by his payments oracceptances in the foreign country, and he continues to hold that titleas his indispensable security until the goods are sold in the UnitedStates and the vendee is called upon to pay for them. This security isnot an ordinary pledge by the importer to the banker, for theimporter has never owned the goods, and moreover he is not able to

deliver the possession; but the security is the complete title vestedoriginally in the bankers, and this characteristic of the transaction hasagain and again been recognized and protected by the courts. Ofcourse, the title is at bottom a security title, as it has sometimes beencalled, and the banker is always under the obligation to reconvey; butonly after his advances have been fully repaid and after the importerhas fulfilled the other terms of the contract.

As further stated inNational Bank vs.Viuda e Hijos de Angel Jose, 22trust receipts:

. . . [I]n a certain manner, . . . partake of the nature of a conditionalsale as provided by the Chattel Mortgage Law, that is, the importer

becomes absolute owner of the imported merchandise as soon an hehas paid its price. The ownership of the merchandise continues to be

vested in the owner thereof or in the person who has advancedpayment, until he has been paid in full, or if the merchandise hasalready been sold, the proceeds of the sale should be turned over tohim by the importer or by his representative or successor in interest.


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Under P.D. No. 115, otherwise known an the Trust Receipts Law, which took effect on29 January 1973, a trust receipt transaction is defined as "any transaction by andbetween a person referred to in this Decree as the entruster, and another personreferred to in this Decree as the entrustee, whereby the entruster, who owns or holdsabsolute title or security interests' over certain specified goods, documents orinstruments, releases the same to the possession of the entrustee upon the latter'sexecution and delivery to the entruster of a signed document called the "trust receipt"

wherein the entrustee binds himself to hold the designated goods, documents orinstruments in trust for the entruster and to sell or otherwise dispose of the goods,

documents or instruments with the obligation to turn over to the entruster the proceedsthereof to the extent of the amount owing to the entruster or as appears in the trustreceipt or the goods, instruments themselves if they are unsold or not otherwisedisposed of, in accordance with the terms and conditions specified in the trusts receipt,or for other purposes substantially equivalent to any one of the following: . . ."

It is alleged in the complaint that private respondents "not only have presumably putsaid machinery to good use and have profited by its operation and/or disposition but

very recent information that (sic) reached plaintiff bank that defendants already sold themachinery covered by the trust receipt to Yupangco Cotton Mills," and that "as trusteesof the property covered by the trust receipt, . . . and therefore acting in fiduciary (sic)capacity, defendants have willfully violated their duty to account for the whereabouts of

the machinery covered by the trust receipt or for the proceeds of any lease, sale or otherdisposition of the same that they may have made, notwithstanding demands therefor;defendants have fraudulently misapplied or converted to their own use any moneyrealized from the lease, sale, and other disposition of said machinery." 23While there isno specific prayer for the delivery to the petitioner by Philippine Rayon of the proceedsof the sale of the machinery covered by the trust receipt, such relief is covered by thegeneral prayer for "such further and other relief as may be just and equitable on thepremises." 24And although it is true that the petitioner commenced a criminal action forthe violation of the Trust Receipts Law, no legal obstacle prevented it from enforcingthe civil liability arising out of the trust, receipt in a separate civil action. Under Section13 of the Trust Receipts Law, the failure of an entrustee to turn over the proceeds ofthe sale of goods, documents or instruments covered by a trust receipt to the extent of

the amount owing to the entruster or as appear in the trust receipt or to return saidgoods, documents or instruments if they were not sold or disposed of in accordancewith the terms of the trust receipt shall constitute the crime of estafa, punishable underthe provisions of Article 315, paragraph 1(b) of the Revised Penal Code. 25Under

Article 33 of the Civil Code, a civil action for damages, entirely separate and distinctfrom the criminal action, may be brought by the injured party in cases of defamation,fraud and physical injuries. Estafa falls underfraud.

We also conclude, for the reason hereinafter discussed, and not for that adduced by thepublic respondent, that private respondent Chi's signature in the dorsal portion of thetrust receipt did not bind him solidarily with Philippine Rayon. The statement at thedorsal portion of the said trust receipt, which petitioner describes as a "solidary guarantyclause", reads:

In consideration of the PRUDENTIAL BANK AND TRUSTCOMPANY complying with the foregoing, we jointly and severallyagree and undertake to pay on demand to the PRUDENTIAL

BANK AND TRUST COMPANY all sums of money which the saidPRUDENTIAL BANK AND TRUST COMPANY may call uponus to pay arising out of or pertaining to, and/or in any eventconnected with the default of and/or non-fulfillment in any respectof the undertaking of the aforesaid:

PHILIPPINE RAYON MILLS, INC.

We further agree that the PRUDENTIAL BANK AND TRUST COMPANY does nothave to take any steps or exhaust its remedy against aforesaid:

before making demand on me/us.

Petitioner insists that by virtue of the clear wording of the statement, specifically theclause ". . . we jointly and severally agree and undertake . . .," and the concludingsentence on exhaustion, Chi's liability therein is solidary.

In holding otherwise, the public respondent ratiocinates as follows:

With respect to the second argument, we have our misgivings as towhether the mere signature of defendant-appellee Chi of (sic) theguaranty agreement, Exhibit "C-1", will make it an actionabledocument. It should be noted that Exhibit "C-1" was prepared and

printed by the plaintiff-appellant. A perusal of Exhibit "C-1" showsthat it was to be signed and executed by two persons. It was signedonly by defendant-appellee Chi. Exhibit "C-1" was to be witnessed bytwo persons, but no one signed in that capacity. The last sentence ofthe guaranty clause is incomplete. Furthermore, the plaintiff-appellantalso failed to have the purported guarantee clause acknowledged


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before a notary public. All these show that the alleged guarantyprovision was disregarded and, therefore, not consummated.

But granting arguendothat the guaranty provision in Exhibit "C-1" wasfully executed and acknowledged still defendant-appellee Chi cannotbe held liable thereunder because the records show that the plaintiff-appellant had neither exhausted the property of the defendant-appellant nor had it resorted to all legal remedies against the saiddefendant-appellant as provided in Article 2058 of the Civil Code.

The obligation of a guarantor is merely accessory under Article 2052of the Civil Code and subsidiary under Article 2054 of the Civil Code.

Therefore, the liability of the defendant-appellee arises only when theprincipal debtor fails to comply with his obligation. 27

Our own reading of the questioned solidary guaranty clause yields no other conclusionthan that the obligation of Chi is only that of a guarantor. This is further bolstered by thelast sentence which speaks of waiver of exhaustion, which, nevertheless, is ineffective inthis case because the space therein for the party whose property may not be exhausted

was not filled up. Under Article 2058 of the Civil Code, the defense of exhaustion(excussion) may be raised by a guarantor before he may be held liable for the obligation.Petitioner likewise admits that the questioned provision is a solidary guaranty clause, thereby

clearly distinguishing it from a contract of surety. It, however, described the guaranty assolidary between the guarantors; this would have been correct if two (2) guarantors hadsigned it. The clause "we jointly and severally agree and undertake" refers to theundertaking of the two (2) parties who are to sign it or to the liability existing betweenthemselves. It does not refer to the undertaking between either one or both of them onthe one hand and the petitioner on the other with respect to the liability described underthe trust receipt. Elsewise stated, their liability is not divisible as between them, i.e., itcan be enforced to its full extent against any one of them.

Furthermore, any doubt as to the import, or true intent of the solidary guaranty clauseshould be resolved against the petitioner. The trust receipt, together with the questionedsolidary guaranty clause, is on a form drafted and prepared solely by the petitioner; Chi's

participation therein is limited to the affixing of his signature thereon. It is, therefore, acontract of adhesion; 28as such, it must be strictly construed against the partyresponsible for its preparation. 29

Neither can We agree with the reasoning of the public respondent that this solidaryguaranty clause was effectively disregarded simply because it was not signed and

witnessed by two (2) persons and acknowledged before a notary public. While indeed,

the clause ought to have been signed by two (2) guarantors, the fact that it was only Chiwho signed the same did not make his act an idle ceremony or render the clause totallymeaningless. By his signing, Chi became the sole guarantor. The attestation by witnessesand the acknowledgement before a notary public are not required by law to make aparty liable on the instrument. The rule is that contracts shall be obligatory in whateverform they may have been entered into, provided all the essential requisites for their

validity are present; however, when the law requires that a contract be in some form inorder that it may be valid or enforceable, or that it be proved in a certain way, thatrequirement is absolute and indispensable. 30With respect to a guaranty, 31which is a

promise to answer for the debt or default of another, the law merely requires that it, orsome note or memorandum thereof, be in writing. Otherwise, it would beunenforceable unless ratified. 32While the acknowledgement of a surety before a notarypublic is required to make the same apublic document, under Article 1358 of the CivilCode, a contract of guaranty does not have to appear in a public document.

And now to the other ground relied upon by the petitioner as basis for the solidaryliability of Chi, namely the criminal proceedings against the latter for the violation ofP.D. No. 115. Petitioner claims that because of the said criminal proceedings, Chi wouldbe answerable for the civil liability arising therefrom pursuant to Section 13 of P.D. No.115. Public respondent rejected this claim because such civil l iability presupposes priorconviction as can be gleaned from the phrase "without prejudice to the civil liability

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

Sec. 13. Penalty Clause.The failure of an entrustee to turn over theproceeds of the sale of the goods, documents or instruments coveredby a trust receipt to the extent of the amount owing to the entrusteror as appears in the trust receipt or to return said goods, documentsor instruments if they were not sold or disposed of in accordance

with the terms of the trust receipt shall constitute the crime of estafa,punishable under the provisions of Article Three hundred andfifteen, paragraph one (b) of Act Numbered Three thousand eighthundred and fifteen, as amended, otherwise known as the RevisedPenal Code. If the violation or offense is committed by a

corporation, partnership, association or other juridical entities, thepenalty provided for in this Decree shall be imposed upon thedirectors, officers, employees or other officials or persons thereinresponsible for the offense, without prejudice to the civil liabilitiesarising from the criminal offense.


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A close examination of the quoted provision reveals that it is the last sentence whichprovides for the correct solution. It is clear that if the violation or offense is committedby a corporation, partnership, association or other juridical entities, the penalty shall beimposed upon the directors, officers, employees or other officials or persons thereinresponsible for the offense. The penalty referred to is imprisonment, the duration of

which would depend on the amount of the fraud as provided for in Article 315 of theRevised Penal Code. The reason for this is obvious: corporations, partnerships,associations and other juridical entities cannot be put in jail. However, it is these entities

which are made liable for the civil liability arising from the criminal offense. This is the

import of the clause "without prejudice to the civil liabilities arising from the criminaloffense." And, as We stated earlier, since that violation of a trust receipt constitutesfraud under Article 33 of the Civil Code, petitioner was acting well within its rights infiling an independent civil action to enforce the civil liability arising therefrom againstPhilippine Rayon.

The remaining issue to be resolved concerns the propriety of the dismissal of the caseagainst private respondent Chi. The trial court based the dismissal, and the respondentCourt its affirmance thereof, on the theory that Chi is not liable on the trust receipt inany capacityeither as surety or as guarantorbecause his signature at the dorsalportion thereof was useless; and even if he could be bound by such signature as a simpleguarantor, he cannot, pursuant to Article 2058 of the Civil Code, be compelled to pay

untilafter petitioner has exhausted and resorted to all legal remedies against the principaldebtor, Philippine Rayon. The records fail to show that petitioner had doneso 33Reliance is thus placed on Article 2058 of the Civil Code which provides:

Art. 2056. The guarantor cannot be compelled to pay the creditorunless the latter has exhausted all the property of the debtor, and hasresorted to all the legal remedies against the debtor.

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

We are not persuaded. Excussion is not a condition sine qua nonfor the institution of an

action against a guarantor. InSouthern Motors, Inc.vs.Barbosa, 34this Court stated:

4. Although an ordinary personal guarantornot a mortgagor orpledgormay demand the aforementioned exhaustion, the creditormay, prior thereto, secure a judgment against said guarantor, whoshall be entitled, however, to a deferment of the execution of saidjudgment against him until after the properties of the principal debtor

shall have been exhausted to satisfy the obligation involved in thecase.

There was then nothing procedurally objectionable in impleading private respondentChi as a co-defendant in Civil Case No. Q-19312 before the trial court. As a matter offact, Section 6, Rule 3 of the Rules of Court on permissive joinder of parties explicitlyallows it. It reads:

Sec. 6. Permissive joinder of parties.All persons in whom or againstwhom any right to relief in respect to or arising out of the sametransaction or series of transactions is alleged to exist, whether jointly,severally, or in the alternative, may, except as otherwise provided inthese rules, join as plaintiffs or be joined as defendants in onecomplaint, where any question of law or fact common to all suchplaintiffs or to all such defendants may arise in the action; but thecourt may make such orders as may be just to prevent any plaintiff ordefendant from being embarrassed or put to expense in connection

with any proceedings in which he may have no interest.

This is the equity rule relating to multifariousness. It is based on trial convenience and isdesigned to permit the joinder of plaintiffs or defendants whenever there is a commonquestion of law or fact. It will save the parties unnecessary work, trouble and expense. 35

However, Chi's liability is limited to the principal obligation in the trust receipt plus allthe accessories thereof including judicial costs; with respect to the latter, he shall only beliable for those costs incurred after being judicially required to pay. 36Interest anddamages, being accessories of the principal obligation, should also be paid; these,however, shall run only from the date of the filing of the complaint. Attorney's fees mayeven be allowed in appropriate cases.37

In the instant case, the attorney's fees to be paid by Chi cannot be the same as that to bepaid by Philippine Rayon since it is only the trust receipt that is covered by the guarantyand not the full extent of the latter's liability. All things considered, he can be held liablefor the sum of P10,000.00 as attorney's fees in favor of the petitioner.

Thus, the trial court committed grave abuse of discretion in dismissing the complaint asagainst private respondent Chi and condemning petitioner to pay him P20,000.00 asattorney's fees.


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In the light of the foregoing, it would no longer necessary to discuss the other issuesraised by the petitioner

WHEREFORE, the instant Petition is hereby GRANTED.

The appealed Decision of 10 March 1986 of the public respondent in AC-G.R.CV No. 66733 and, necessarily, that of Branch 9 (Quezon City) of the thenCourt of First Instance of Rizal in Civil Case No. Q-19312 are herebyREVERSED and SET ASIDE and another is hereby entered:

1. Declaring private respondent Philippine RayonMills, Inc. liable on the twelve drafts in question(Exhibits "X", "X-1" to "X-11", inclusive) and onthe trust receipt (Exhibit "C"), and ordering it topay petitioner: (a) the amounts due thereon in thetotal sum of P956,384.95 as of 15 September 1974,

with interest thereon at six percent (6%) perannum from 16 September 1974 until it is fullypaid, less whatever may have been applied theretoby virtue of foreclosure of mortgages, if any; (b) asum equal to ten percent (10%) of the aforesaidamount as attorney's fees; and (c) the costs.

2. Declaring private respondent Anacleto R. Chisecondarily liable on the trust receipt and orderinghim to pay the face value thereof, with interest atthe legal rate, commencing from the date of thefiling of the complaint in Civil Case No. Q-19312until the same is fully paid as well as the costs andattorney's fees in the sum of P10,000.00 if the writof execution for the enforcement of the aboveawards against Philippine Rayon Mills, Inc. isreturned unsatisfied.

Costs against private respondents.

SO ORDERED.

G.R. No. L-16106 December 30, 1961

REPUBLIC OF THE PHILIPPINES, plaintiff-appellant,vs.PHILIPPINE NATIONAL BANK, ET AL.,defendants,

THE FIRST NATIONAL CITY BANK OF NEW YORK, defendant-appellee.

Office of the Solicitor General for plaintiff-appellant.Picazo, Lichauco and Agcaoili for defendant-appellee.

BAUTISTA ANGELO,J.:

The Republic of the Philippines filed on September 25, 1957 before the Court of FirstInstance of Manila a complaint for escheat of certain unclaimed bank deposits balancesunder the provisions of Act No. 3936 against several banks, among them the FirstNational City Bank of New York. It is alleged that pursuant to Section 2 of said Actdefendant banks forwarded to the Treasurer of the Philippines a statement under oathof their respective managing officials of all the credits and deposits held by them infavor of persons known to be dead or who have not made further deposits or

withdrawals during the period of 10 years or more. Wherefore, it is prayed that said

credits and deposits be escheated to the Republic of the Philippines by orderingdefendant banks to deposit them to its credit with the Treasurer of the Philippines.

In its answer the First National City Bank of New York claims that, while it admits thatvarious savings deposits, pre-war inactive accounts, and sundry accounts contained in itsreport submitted to the Treasurer of the Philippines pursuant to Act No. 3936, totallingmore than P100,000.00, which remained dormant for 10 years or more, are subject toescheat however, it has inadvertently included in said report certain items amounting toP18,589.89 which, properly speaking, are not credits or deposits within thecontemplation of Act No. 3936. Hence, it prayed that said items be not included in theclaim of plaintiff.

After hearing the court a quorendered judgment holding that cashier's is or manager'schecks and demand drafts as those which defendant wants excluded from the complaintcome within the purview of Act No. 3936, but not the telegraphic transfer payment

which orders are of different category. Consequently, the complaint was dismissed withregard to the latter. But, after a motion to reconsider was filed by defendant, the court aquochanged its view and held that even said demand drafts do not come within thepurview of said Act and so amended its decision accordingly. Plaintiff hasappealed.lawphil.net


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Section 1, Act No. 3936, provides:

Section 1. "Unclaimed balances" within the meaning of this Act shall includecredits or deposits of money, bullion, security or other evidence ofindebtedness of any kind, and interest thereon with banks, as hereinafterdefined, in favor of any person unheard from for a period of ten years ormore. Such unclaimed balances, together with the increase and proceedsthereof, shall be deposited with the Insular Treasure to the credit of theGovernment of the Philippine Islands to be as the Philippine Legislature may

direct.

It would appear that the term "unclaimed balances" that are subject to escheat includecredits or deposits money, or other evidence of indebtedness of any kind with banks, infavor of any person unheard from for a period of 10 years or more. And as correctlystated by the trial court, the term "credit" in its usual meaning is a sum credited on thebooks of a company to a person who appears to be entitled to it. It presupposes acreditor-debtor relationship, and may be said to imply ability, by reason of property orestates, to make a promised payment ( In reFord, 14 F. 2d 848, 849). It is the correlativeto debt or indebtedness, and that which is due to any person, a distinguished from that

which he owes (Mountain Motor Co. vs. Solof, 124 S.E., 824, 825; Eric vs. Walsh, 61Atl. 2d 1, 4; See alsoLibby vs. Hopkins, 104 U.S. 303, 309; Prudential Insurance Co. of

America vs. Nelson, 101 F. 2d, 441, 443; Barnes vs. Treat, 7 Mass. 271, 274). The sameis true with the term "deposits" in banks where the relationship created between thedepositor and the bank is that of creditor and debtor (Article 1980, Civil Code; Gullas

vs. National Bank, 62 Phil. 915; Gopoco Grocery, et al. vs. Pacific Coast Biscuit Co., etal., 65 Phil. 443).

The questions that now arise are: Do demand draft and telegraphic orders come withinthe meaning of the term "credits" or "deposits" employed in the law? Can their importbe considered as a sum credited on the books of the bank to a person who appears tobe entitled to it? Do they create a creditor-debtor relationship between drawee and thepayee?

The answers to these questions require a digression the legal meaning of said bankingterminologies.

To begin with, we may say that a demand draft is a bill of exchange payable on demand(Arnd vs. Aylesworth, 145 Iowa 185; Ward vs. City Trust Company, 102 N.Y.S. 50;Bank of Republic vs. Republic State Bank, 42 S.W. 2d, 27). Considered as a bill ofexchange, a draft is said to be, like the former, an open letter of request from, and an

order by, one person on another to pay a sum of money therein mentioned to a thirdperson, on demand or at a future time therein specified (13 Words and Phrases, 371). Asa matter of fact, the term "draft" is often used, and is the common term, for all bills ofexchange. And the words "draft" and "bill of exchange" are used indiscriminately (Ennis

vs. Coshoctan Nat. Bank, 108 S.E., 811; Hinnemann vs. Rosenback, 39 N.Y. 98, 100,101; Wilson vs. Bechenau, 48 Supp. 272, 275).

On the other hand, a bill of exchange within the meaning of our NegotiableInstruments Law (Act No. 2031) does not operate as an assignment of funds in the

hands of the drawee who is not liable on the instrument until he accepts it. This is theclear import of Section 127. It says: "A bill of exchange of itself does not operate as anassignment of the funds in the hands of the drawee available for the payment thereonand the drawee is not liable on the bill unless and until he accepts the same." In other

words, in order that a drawee may be liable on the draft and then become obligated tothe payee it is necessary that he first accepts the same. In fact, our law requires that withregard to drafts or bills of exchange there is need that they be presented either foracceptance or for payment within a reasonable time after their issuance or after their lastnegotiation thereof as the case may be (Section 71, Act 2031). Failure to make suchpresentment will discharge the drawer from liability or to the extent of the loss causedby the delay (Section 186, Ibid.)

Since it is admitted that the demand drafts herein involved have not been presentedeither for acceptance or for payment, the inevitable consequence is that the appelleebank never had any chance of accepting or rejecting them. Verily, appellee bank neverbecame a debtor of the payee concerned and as such the aforesaid drafts cannot beconsidered as credits subject to escheat within the meaning of the law.

But a demand draft is very different from a cashier's or manager's cheek, contrary toappellant's pretense, for it has been held that the latter is a primary obligation of thebank which issues it and constitutes its written promise to pay upon demand. Thus, acashier's check has been clearly characterized in In ReBank of the United States, 277N.Y.S. 96. 100, as follows:

A cashier's check issued by a bank, however, is not an ordinary draft. The latteris a bill of exchange payable demand. It is an order upon a third partypurporting to drawn upon a deposit of funds. Drinkall v. Movious State Bank, 11N.D. 10, 88 N.W. 724, 57 L.R.A. 341, 95 Am. St. Rep. 693; State v. TylerCounty State Bank (Tex. Com. App.) 277 S.W. 625, 42 A.L.R. 1347. A cashier'scheck is of a very different character. It is the primary obligation of the bank

which issues it (Nissenbaum v. State, 38 Ga. App. 253, S.E. 776) and


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constitutes its written promise to pay upon demand (Steinmetz v. Schultz, 59S.D. 603, 241 N.W. 734)....lawphil.net

The following definitions cited by appellant also confirm this view:

A cashier's check is a check of the bank's cashier on his or another bank. It isin effect a bill of exchange drawn by a bank on itself and accepted in advanceby the act of issuance (10 C.J.S. 409).

A cashier's check issued on request of a depositor is the substantial equivalentof a certified check and the deposit represented by the check passes to thecredit of the checkholder, who is thereafter a depositor to that amount(Lummus Cotton Gin Co. v. Walker, 70 So. 754, 756, 195 Ala. 552).

A cashier's check, being merely a bill of exchange drawn by a bank on itself,and accepted in advance by the act of issuance, is not subject to countermandby the payee after indorsement, and has the same legal effects as a certificatedeposit or a certified check (Walker v. Sellers, 77 So. 715, 201 Ala. 189).

A demand draft is not therefore of the same category as a cashier's check which should

come within the purview of the law.

The case, however, is different with regard to telegraphic payment order. It is said thatas the transaction is for the establishment of a telegraphic or cable transfer theagreement to remit creates a contractual obligation a has been termed a purchase andsale transaction (9 C.J.S. 368). The purchaser of a telegraphic transfer upon makingpayment completes the transaction insofar as he is concerned, though insofar as theremitting bank is concerned the contract is executory until the credit is established (Ibid.)

We agree with the following comment the Solicitor General: "This is so because thedrawer bank was already paid the value of the telegraphic transfer payment order. In theparticular cases under consideration it appears in the books of the defendant bank thatthe amounts represented by the telegraphic payment orders appear in the names of the

respective payees. If the latter choose to demand payment of their telegraphic transfersat the time the same was (were) received by the defendant bank, there could be noquestion that this bank would have to pay them. Now, the question is, if the payeesdecide to have their money remain for sometime in the defendant bank, can the lattermaintain that the ownership of said telegraphic payment orders is now with the drawerbank? The latter was already paid the value of the telegraphic payment orders otherwiseit would not have transmitted the same to the defendant bank. Hence, it is absurd to saythat the drawer banks are still the owners of said telegraphic payment orders."

WHEREFORE, the decision of the trial court is hereby modified in the sense that theitems specifically referred to and listed under paragraph 3 of appellee bank's answerrepresenting telegraphic transfer payment orders should be escheated in favor of theRepublic of the Philippines. No costs.


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G.R. No. 171266 April 4, 2007

INTERNATIONAL EXCHANGE BANK, Petitioner,vs.COMMISSIONER OF INTERNAL REVENUE,Respondent.

D E C I S I O N

CARPIO MORALES,J.:

Is a Savings Account-Fixed Savings Deposit (FSD) evidenced by a passbook issued byInternational Exchange Bank (petitioner) subject to documentary stamp tax (DST) forthe years 1996 and 1997?

Petitioner, a banking institution duly organized and existing under the laws of thePhilippines, was on April 13, 1999 served Letter of Authority No. 0000205351by theCommissioner of Internal Revenue (respondent) directing the examination by a "Special

Team created pursuant to RSO 797-98" (Special Team) of petitioners books ofaccounts and other accounting records for the year 1997 and "unverified prior years."

An examination of said documents was in fact conducted.

Petitioner subsequently received on November 16, 1999 a "Notice to Taxpayer"2fromthe Assistant Commissioner, Enforcement Service of the Bureau of Internal Revenue,notifying it of the results of the examination conducted by the Special Team regardingits tax l iabilities, which amounted to P465,158,118.31 for 1996 and P17,033,311,974.23for 1997, and requesting it to appear for an informal conference to present its side.

Between November3and December41999, petitioners representatives met with theSpecial Team to discuss and/or dispute portions of the Special Teams audit findings.Eventually, the parties resolved issues relating to transactions involving payment of final

withholding and gross receipts taxes.5

On January 6, 2000, petitioner was personally served with an undated Pre-AssessmentNotice6(PAN) assessing it of deficiency on its purchases of securities from the BangkoSentral ng Pilipinas or Government Securities Purchased-Reverse Repurchase

Agreement (RRPA) and its FSD for the taxable years 1996 and 1997, viz:

Details of Discrepancies(Taxable Year 1996)

INDUSTRY ISSUES

1. DOCUMENTARY STAMP TAX (DST)On Government Securities Purchased-RRPA and Savings Deposits - SD totaling P25,180,492.15.

Government Securities Purchased-RRP amounting to P3,584,098,013.35 is subject toDST under Section 180 of the NIRC, as amended, since this falls under theclassification of Deposits Substitutes as defined by RR 3-97.

Savings Deposit-FSD amounting to P9,845,497,800.27 should be treated as timedeposits considering that its features are very much the same as time deposits (interestrates; terms). In substance, these are certificate[s] of deposits subject to DocumentaryStamp Tax under Section 180 of the NIRC which provides among others thatcertificate[s] of deposits bearing interest and others not payable on sight or demand aresubject to DST.7

Details of Discrepancies(Taxable Year 1997)

INDUSTRY ISSUES

1. DOCUMENTARY STAMP TAX (DST)On Government Securities Purchased-RRPA and Savings Deposits-FSD totaling P75,383,751.55.

Government Securities Purchased-RRP amounting to P12,180.427,820.44 is subject toDST under Sec. 180 of the NIRC, as amended, since this falls under the classification ofDeposit Substitutes as defined by RR 3-97.

Savings Deposits-FSD amounting to P28,024,239,673.35 should be treated as timedeposits considering that its features are very much the same as time deposits (interestrates; terms). In substance, these are certificates of deposit subject to DocumentaryStamp Tax under Section 180 of the NIRC which provides among others that

certificate[s] of deposit bearing interest and others not payable on sight or demand aresubject to DST.8(Underscoring in the original)

The PAN advised petitioner that in case it was not agreeable to the above-quotedfindings, it may "see the Assistant Commissioner-Enforcement Service to clarify issuesarising from the investigation and/or review," and its failure to do so within 15 daysfrom receipt of the PAN would mean that it was agreeable.9
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On January 12, 2000, petitioner received a Formal Assessment Notice10(FAN) fordeficiency DST on its RRPA and FSD, including surcharges, in the amountsof P25,180,492.15 for 1996 and P75,383,751.55 for 1997, and an accompanying demandletter11requesting payment thereof within 30 days.

Acting on the FAN, petitioner filed on February 11, 2000 a protest letter12alleging thatthe assessments should be reconsidered on the grounds that: (1) the assessments are nulland void for having been issued without any authority and due process, and were madebeyond the prescribed period for making assessments; (2) there is no law imposing DST

on RRPA, and assuming that DST was payable, it is the Bangko Sentral ng Pilipinaswhich is liable therefor; (3) there is no law imposing DST on its FSD; and (4) assumingthe deficiency assessments for DST were proper, the imposition of surcharges waspatently without legal authority.

Respondent failed to act on the protest, prompting petitioner to file a petition forreview before the Court of Tax Appeals (CTA).

By Decision13of October 26, 2004, the First Division of the CTA (CTA Division)disposed as follows:

WHEREFORE, petitioners deficiency assessments pertaining to the reverse purchaseagreements in the amounts ofP6,720,183.77 and P22,838,302.16 inclusive of surcharges,for the years 1996 and 1997, respectively, are hereby CANCELLED and

WITHDRAWN. However, the deficiency assessments pertaining to savings deposits-FSD are hereby UPHELD and petitioner is ORDERED to PAY the respondent theamount of P71,005,757.77 representing deficiency documentary stamp tax for the years1996 and 1997. In addition thereto, petitioner is ORDERED to PAY respondent 20%delinquency interest from February 12, 2000 until fully paid pursuant to Section 249 ofthe 1997 NIRC.14(Emphasis and underscoring supplied)

Petitioner moved for reconsideration of the CTA Division decision. Respondent movedtoo for a partial review of the decision.

Petitioner argued that its FSD is not subject to DST since it was not one of thedocuments enumerated either under the 1977 Tax Code (Tax Code) or the 1997National Internal Revenue Code (NIRC). Respondent on the other hand argued thatpetitioner should be liable not only for DST on its FSD but also on its RRPA.

For lack of merit, the CTA Division, by Resolution15of April 20, 2005, deniedpetitioners motion for reconsideration and respondents motion for partialreconsideration.

Only petitioner appealed to the CTA En Banc before which it proffered that its FSDcannot be considered a certificate of deposit subject to DST under Section 180 of the

Tax Code for, unlik

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