CALTEX (PHILIPPINES), INC.
, petitioner, if he desired replacement of said lost CTDs (TSN, February
vs.
COURT OF APPEALS and SECURITY BANK AND TRUST
COMPANY, respondents.
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 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);
CTD CTD
Dates Serial Nos. Quantity Amount
22 Feb. 82 90101 to 90120 20 P80,000
26 Feb. 82 74602 to 74691 90 360,000
2 Mar. 82 74701 to 74740 40 160,000
4 Mar. 82 90127 to 90146 20 80,000
5 Mar. 82 74797 to 94800 4 16,000
5 Mar. 82 89965 to 89986 22 88,000
5 Mar. 82 70147 to 90150 4 16,000
8 Mar. 82 90001 to 90020 20 80,000
9 Mar. 82 90023 to 90050 28 112,000
9 Mar. 82 89991 to 90000 10 40,000
9 Mar. 82 90251 to 90272 22 88,000
——— ————
Total 280 P1,120,000
===== ========
2. Angel dela Cruz delivered the said certificates of time
(CTDs) to herein plaintiff in connection with his purchased 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 Manger, 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,
9, 1987, pp. 48-50).
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 (de la 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, set-off 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 pre-terminate 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"
obligation 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.
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 COMPANY
6778 Ayala Ave., Makati No. 90101
Metro Manila, Philippines
SUCAT OFFICEP 4,000.00
CERTIFICATE OF DEPOSIT
Rate 16%
Date of Maturity FEB. 23, 1984 FEB 22, 1982,
19____
This is to Certify that B E A R E R has
deposited in this Bank the sum of PESOS:
FOUR THOUSAND ONLY, SECURITY
BANK 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, nationalizing 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 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 reffered
to in the CTDs is no other than Mr. Angel de la Cruz.
x x x           x x x          x x x
Atty. Calida:
q In 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:
a Yes, your Honor, and we have the record
to show that Angel dela Cruz was the one
who cause (sic) the amount.
Atty. Calida:
q And no other person or entity or company,
Mr. Witness?
witness:
a None, your Honor. 7
xxx xxx xxx
Atty. Calida:
q Mr. Witness, who is the depositor
identified in all of these certificates of time
deposit insofar as the bank is concerned?
witness:
a Angel dela Cruz is the depositor. 8
x x x           x x x          x x x
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.
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" (Emphasis 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 particularity
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 Intergrated 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
inexistence 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 lien holder 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.
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 raised
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.
(Emphasis ours.)
x x x           x x x          x x x
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.
WHEREFORE, on the modified premises above set forth, the petition is
DENIED and the appealed decision is hereby AFFIRMED.
SO ORDERED.
CONSOLIDATED PLYWOOD INDUSTRIES, INC., HENRY WEE, and
RODOLFO T. VERGARA, petitioners,
vs.
IFC LEASING AND ACCEPTANCE CORPORATION, respondent.
This is a petition for certiorari under Rule 45 of the Rules of Court which
assails on questions of law a decision of the Intermediate Appellate Court in
AC-G.R. CV No. 68609 dated July 17, 1985, as well as its resolution dated
October 17, 1985, denying the motion for reconsideration.
The antecedent facts culled from the petition are as follows:
The petitioner is a corporation engaged in the logging business. It had for its
program of logging activities for the year 1978 the opening of additional
roads, and simultaneous logging operations along the route of said roads, in
its logging concession area at Baganga, Manay, and Caraga, Davao
Oriental. For this purpose, it needed two (2) additional units of tractors.
Cognizant of petitioner-corporation's need and purpose, Atlantic Gulf &
Pacific Company of Manila, through its sister company and marketing arm,
Industrial Products Marketing (the "seller-assignor"), a corporation dealing in
tractors and other heavy equipment business, offered to sell to petitioner-
corporation two (2) "Used" Allis Crawler Tractors, one (1) an HDD-21-B and
the other an HDD-16-B.
In order to ascertain the extent of work to which the tractors were to be
exposed, (t.s.n., May 28, 1980, p. 44) and to determine the capability of the
"Used" tractors being offered, petitioner-corporation requested the seller-
assignor to inspect the job site. After conducting said inspection, the seller-
assignor assured petitioner-corporation that the "Used" Allis Crawler Tractors
which were being offered were fit for the job, and gave the corresponding
warranty of ninety (90) days performance of the machines and availability of
parts. (t.s.n., May 28, 1980, pp. 59-66).
With said assurance and warranty, and relying on the seller-assignor's skill
and judgment, petitioner-corporation through petitioners Wee and Vergara,
president and vice- president, respectively, agreed to purchase on
installment said two (2) units of "Used" Allis Crawler Tractors. It also paid the
down payment of Two Hundred Ten Thousand Pesos (P210,000.00).
On April 5, 1978, the seller-assignor issued the sales invoice for the two 2)
units of tractors (Exh. "3-A"). At the same time, the deed of sale with chattel
mortgage with promissory note was executed (Exh. "2").
Simultaneously with the execution of the deed of sale with chattel mortgage
with promissory note, the seller-assignor, by means of a deed of assignment
(E exh. " 1 "), assigned its rights and interest in the chattel mortgage in favor
of the respondent.
Immediately thereafter, the seller-assignor delivered said two (2) units of
"Used" tractors to the petitioner-corporation's job site and as agreed, the
seller-assignor stationed its own mechanics to supervise the operations of
the machines.
Barely fourteen (14) days had elapsed after their delivery when one of the
tractors broke down and after another nine (9) days, the other tractor likewise
broke down (t.s.n., May 28, 1980, pp. 68-69).
On April 25, 1978, petitioner Rodolfo T. Vergara formally advised the seller-
assignor of the fact that the tractors broke down and requested for the seller-
assignor's usual prompt attention under the warranty (E exh. " 5 ").
In response to the formal advice by petitioner Rodolfo T. Vergara, Exhibit "5,"
the seller-assignor sent to the job site its mechanics to conduct the
necessary repairs (Exhs. "6," "6-A," "6-B," 16 C," "16-C-1," "6-D," and "6-E"),
but the tractors did not come out to be what they should be after the repairs
were undertaken because the units were no longer serviceable (t. s. n., May
28, 1980, p. 78).
Because of the breaking down of the tractors, the road building and
simultaneous logging operations of petitioner-corporation were delayed and
petitioner Vergara advised the seller-assignor that the payments of the
installments as listed in the promissory note would likewise be delayed until
the seller-assignor completely fulfills its obligation under its warranty (t.s.n,
May 28, 1980, p. 79).
Since the tractors were no longer serviceable, on April 7, 1979, petitioner
Wee asked the seller-assignor to pull out the units and have them
reconditioned, and thereafter to offer them for sale. The proceeds were to be
given to the respondent and the excess, if any, to be divided between the
seller-assignor and petitioner-corporation which offered to bear one-half (1/2)
of the reconditioning cost (E exh. " 7 ").
No response to this letter, Exhibit "7," was received by the petitioner-
corporation and despite several follow-up calls, the seller-assignor did
nothing with regard to the request, until the complaint in this case was filed
by the respondent against the petitioners, the corporation, Wee, and
Vergara.
The complaint was filed by the respondent against the petitioners for the
recovery of the principal sum of One Million Ninety Three Thousand Seven
Hundred Eighty Nine Pesos & 71/100 (P1,093,789.71), accrued interest of
One Hundred Fifty One Thousand Six Hundred Eighteen Pesos & 86/100
(P151,618.86) as of August 15, 1979, accruing interest thereafter at the rate
of twelve (12%) percent per annum, attorney's fees of Two Hundred Forty
Nine Thousand Eighty One Pesos & 71/100 (P249,081.7 1) and costs of suit.
The petitioners filed their amended answer praying for the dismissal of the
complaint and asking the trial court to order the respondent to pay the
petitioners damages in an amount at the sound discretion of the court,
Twenty Thousand Pesos (P20,000.00) as and for attorney's fees, and Five
Thousand Pesos (P5,000.00) for expenses of litigation. The petitioners
likewise prayed for such other and further relief as would be just under the
premises.
In a decision dated April 20, 1981, the trial court rendered the following
judgment:
WHEREFORE, judgment is hereby rendered:
1. ordering defendants to pay jointly and severally in their
official and personal capacities the principal sum of ONE
MILLION NINETY THREE THOUSAND SEVEN HUNDRED
NINETY EIGHT PESOS & 71/100 (P1,093,798.71) with
accrued interest of ONE HUNDRED FIFTY ONE
THOUSAND SIX HUNDRED EIGHTEEN PESOS & 86/100
(P151,618.,86) as of August 15, 1979 and accruing interest
thereafter at the rate of 12% per annum;
2. ordering defendants to pay jointly and severally attorney's
fees equivalent to ten percent (10%) of the principal and to
pay the costs of the suit.
Defendants' counterclaim is disallowed. (pp. 45-46, Rollo)
On June 8, 1981, the trial court issued an order denying the motion for
reconsideration filed by the petitioners.
Thus, the petitioners appealed to the Intermediate Appellate Court and
assigned therein the following errors:
I A study of the questioned promissory note reveals that it is a
THAT THE LOWER COURT ERRED IN FINDING THAT THE SELLER
ATLANTIC GULF AND PACIFIC COMPANY OF MANILA DID NOT
APPROVE DEFENDANTS-APPELLANTS CLAIM OF WARRANTY.
II
THAT THE LOWER COURT ERRED IN FINDING THAT PLAINTIFF-
APPELLEE IS A HOLDER IN DUE COURSE OF THE PROMISSORY NOTE
AND SUED UNDER SAID NOTE AS HOLDER THEREOF IN DUE
COURSE.
On July 17, 1985, the Intermediate Appellate Court issued the challenged
decision affirming in toto the decision of the trial court. The pertinent portions
of the decision are as follows:
xxx xxx xxx
From the evidence presented by the parties on the issue of
warranty, We are of the considered opinion that aside from
the fact that no provision of warranty appears or is provided
in the Deed of Sale of the tractors and even admitting that in
a contract of sale unless a contrary intention appears, there
is an implied warranty, the defense of breach of warranty, if
there is any, as in this case, does not lie in favor of the
appellants and against the plaintiff-appellee who is the
assignee of the promissory note and a holder of the same in
due course. Warranty lies in this case only between
Industrial Products Marketing and Consolidated Plywood
Industries, Inc. The plaintiff-appellant herein upon application
by appellant corporation granted financing for the purchase
of the questioned units of Fiat-Allis Crawler,Tractors.
xxx xxx xxx
Holding that breach of warranty if any, is not a defense
available to appellants either to withdraw from the contract
and/or demand a proportionate reduction of the price with
damages in either case (Art. 1567, New Civil Code). We now
come to the issue as to whether the plaintiff-appellee is a
holder in due course of the promissory note.
To begin with, it is beyond arguments that the plaintiff-
appellee is a financing corporation engaged in financing and
receivable discounting extending credit facilities to
consumers and industrial, commercial or agricultural
enterprises by discounting or factoring commercial papers or
accounts receivable duly authorized pursuant to R.A. 5980
otherwise known as the Financing Act.
negotiable instrument which was discounted or sold to the
IFC Leasing and Acceptance Corporation for P800,000.00
(Exh. "A") considering the following. it is in writing and signed
by the maker; it contains an unconditional promise to pay a
certain sum of money payable at a fixed or determinable
future time; it is payable to order (Sec. 1, NIL); the
promissory note was negotiated when it was transferred and
delivered by IPM to the appellee and duly endorsed to the
latter (Sec. 30, NIL); it was taken in the conditions that the
note was complete and regular upon its face before the
same was overdue and without notice, that it had been
previously dishonored and that the note is in good faith and
for value without notice of any infirmity or defect in the title of
IPM (Sec. 52, NIL); that IFC Leasing and Acceptance
Corporation held the instrument free from any defect of title
of prior parties and free from defenses available to prior
parties among themselves and may enforce payment of the
instrument for the full amount thereof against all parties
liable thereon (Sec. 57, NIL); the appellants engaged that
 they would pay the note according to its tenor, and admit the
existence of the payee IPM and its capacity to endorse (Sec.
60, NIL).
In view of the essential elements found in the questioned
promissory note, We opine that the same is legally and
conclusively enforceable against the defendants-appellants.
WHEREFORE, finding the decision appealed from according
to law and evidence, We find the appeal without merit and
thus affirm the decision  in toto. With costs against the
appellants. (pp. 50-55, Rollo)
The petitioners' motion for reconsideration of the decision of July 17, 1985
was denied by the Intermediate Appellate Court in its resolution dated
October 17, 1985, a copy of which was received by the petitioners on
October 21, 1985.
Hence, this petition was filed on the following grounds:
I.
ON ITS FACE, THE PROMISSORY NOTE IS CLEARLY NOT A
NEGOTIABLE INSTRUMENT AS DEFINED UNDER THE LAW SINCE IT IS
NEITHER PAYABLE TO ORDER NOR TO BEARER.
II
THE RESPONDENT IS NOT A HOLDER IN DUE COURSE: AT BEST, IT IS
A MERE ASSIGNEE OF THE SUBJECT PROMISSORY NOTE.
III.
SINCE THE INSTANT CASE INVOLVES A NON-NEGOTIABLE
INSTRUMENT AND THE TRANSFER OF RIGHTS WAS THROUGH A
MERE ASSIGNMENT, THE PETITIONERS MAY RAISE AGAINST THE
RESPONDENT ALL DEFENSES THAT ARE AVAILABLE TO IT AS
AGAINST THE SELLER- ASSIGNOR, INDUSTRIAL PRODUCTS
MARKETING.
IV.
THE PETITIONERS ARE NOT LIABLE FOR THE PAYMENT OF THE
PROMISSORY NOTE BECAUSE:
A) THE SELLER-ASSIGNOR IS GUILTY OF BREACH OF WARRANTY
UNDER THE LAW;
B) IF AT ALL, THE RESPONDENT MAY RECOVER ONLY FROM THE
SELLER-ASSIGNOR OF THE PROMISSORY NOTE.
V.
THE ASSIGNMENT OF THE CHATTEL MORTGAGE BY THE SELLER-
ASSIGNOR IN FAVOR OF THE RESPONDENT DOES NOT CHANGE THE
NATURE OF THE TRANSACTION FROM BEING A SALE ON
INSTALLMENTS TO A PURE LOAN.
VI.
THE PROMISSORY NOTE CANNOT BE ADMITTED OR USED IN
EVIDENCE IN ANY COURT BECAUSE THE REQUISITE DOCUMENTARY
STAMPS HAVE NOT BEEN AFFIXED THEREON OR CANCELLED.
The petitioners prayed that judgment be rendered setting aside the decision
dated July 17, 1985, as well as the resolution dated October 17, 1985 and
dismissing the complaint but granting petitioners' counterclaims before the
court of origin.
On the other hand, the respondent corporation in its comment to the petition
filed on February 20, 1986, contended that the petition was filed out of time;
that the promissory note is a negotiable instrument and respondent a holder
in due course; that respondent is not liable for any breach of warranty; and
finally, that the promissory note is admissible in evidence.
The core issue herein is whether or not the promissory note in question is a
negotiable instrument so as to bar completely all the available defenses of
the petitioner against the respondent-assignee.
Preliminarily, it must be established at the outset that we consider the instant
petition to have been filed on time because the petitioners' motion for
reconsideration actually raised new issues. It cannot, therefore, be
considered pro- formal.
The petition is impressed with merit.
First, there is no question that the seller-assignor breached its express 90-
day warranty because the findings of the trial court, adopted by the
respondent appellate court, that "14 days after delivery, the first tractor broke
down and 9 days, thereafter, the second tractor became inoperable" are
sustained by the records. The petitioner was clearly a victim of a warranty not
honored by the maker.
The Civil Code provides that:
ART. 1561. The vendor shall be responsible for warranty
against the hidden defects which the thing sold may have,
should they render it unfit for the use for which it is intended,
or should they diminish its fitness for such use to such an
extent that, had the vendee been aware thereof, he would
not have acquired it or would have given a lower price for it;
but said vendor shall not be answerable for patent defects or
those which may be visible, or for those which are not visible
 if the vendee is an expert who, by reason of his trade or
profession, should have known them.
ART. 1562. In a sale of goods, there is an implied warranty
or condition as to the quality or fitness of the goods, as
follows:
(1) Where the buyer, expressly or by implication makes
known to the seller the particular purpose for which the
goods are acquired, and it appears that the buyer relies on
the sellers skill or judge judgment (whether he be the grower
or manufacturer or not), there is an implied warranty that the
goods shall be reasonably fit for such purpose;
xxx xxx xxx
ART. 1564. An implied warranty or condition as to the quality
or fitness for a particular purpose may be annexed by the
usage of trade.
xxx xxx xxx
ART. 1566. The vendor is responsible to the vendee for any
hidden faults or defects in the thing sold even though he was
not aware thereof.
This provision shall not apply if the contrary has been
stipulated, and the vendor was not aware of the hidden faults
or defects in the thing sold. (Emphasis supplied).
It is patent then, that the seller-assignor is liable for its breach of warranty
against the petitioner. This liability as a general rule, extends to the
corporation to whom it assigned its rights and interests unless the assignee
is a holder in due course of the promissory note in question, assuming the
note is negotiable, in which case the latter's rights are based on the
negotiable instrument and assuming further that the petitioner's defenses
may not prevail against it.
Secondly, it likewise cannot be denied that as soon as the tractors broke
down, the petitioner-corporation notified the seller-assignor's sister company,
AG & P, about the breakdown based on the seller-assignor's express 90-day
warranty, with which the latter complied by sending its mechanics. However,
due to the seller-assignor's delay and its failure to comply with its warranty,
the tractors became totally unserviceable and useless for the purpose for
which they were purchased.
Thirdly, the petitioner-corporation, thereafter, unilaterally rescinded its
contract with the seller-assignor.
Articles 1191 and 1567 of the Civil Code provide that:
ART. 1191. The power to rescind obligations is implied in
reciprocal ones, in case one of the obligors should not
comply with what is incumbent upon him.
The injured party may choose between the fulfillment and
the rescission of the obligation with the payment of damages
in either case. He may also seek rescission, even after he
has chosen fulfillment, if the latter should become
impossible.
xxx xxx xxx
ART. 1567. In the cases of articles 1561, 1562, 1564, 1565
and 1566, the vendee may elect between withdrawing from
the contract and demanding a proportionate reduction of the
price, with damages in either case. (Emphasis supplied)
Petitioner, having unilaterally and extrajudicially rescinded its contract with
the seller-assignor, necessarily can no longer sue the seller-assignor except
by way of counterclaim if the seller-assignor sues it because of the
rescission.
In the case of the University of the Philippines v. De los Angeles (35 SCRA
102) we held:
In other words, the party who deems the contract violated
may consider it resolved or rescinded, and act
accordingly, without previous court action, but it proceeds at
its own risk. For it is only the final judgment of the
corresponding court that will conclusively and finally settle
whether the action taken was or was not correct in law.
But  the law definitely does not require that the contracting
party who believes itself injured must first file suit and wait
for adjudgement before taking extrajudicial steps to protect
its interest. Otherwise, the party injured by the other's
breach will have to passively sit and watch its damages
accumulate during the pendency of the suit until the final
judgment of rescission is rendered when the law itself
requires that he should exercise due diligence to minimize
its own damages (Civil Code, Article 2203). (Emphasis
supplied)
Going back to the core issue, we rule that the promissory note in question is
not a negotiable instrument.
The pertinent portion of the note is as follows:
FOR VALUE RECEIVED, I/we jointly and severally promise
to pay to the INDUSTRIAL PRODUCTS MARKETING, the
sum of ONE MILLION NINETY THREE THOUSAND SEVEN
HUNDRED EIGHTY NINE PESOS & 71/100 only (P
 1,093,789.71), Philippine Currency, the said principal sum,
to be payable in 24 monthly installments starting July 15,
1978 and every 15th of the month thereafter until fully
paid. ...
Considering that paragraph (d), Section 1 of the Negotiable Instruments Law
requires that a promissory note "must be payable to order or bearer, " it
cannot be denied that the promissory note in question is not a negotiable
instrument.
The instrument in order to be considered negotiablility-i.e.
must contain the so-called 'words of negotiable, must be
payable to 'order' or 'bearer'. These words serve as an
expression of consent that the instrument may be
transferred. This consent is indispensable since a maker
assumes greater risk under a negotiable instrument than
under a non-negotiable one. ...
xxx xxx xxx
When instrument is payable to order.
SEC. 8. WHEN PAYABLE TO ORDER. — The instrument is
payable to order where it is drawn payable to the order of a
specified person or to him or his order. . . .
xxx xxx xxx
These are the only two ways by which an instrument may be
made payable to order. There must always be a specified
person named in the instrument. It means that the bill or note
is to be paid to the person designated in the instrument or to
any person to whom he has indorsed and delivered the
same. Without the words "or order" or"to the order of, "the
instrument is payable only to the person designated therein
and is therefore non-negotiable. Any subsequent purchaser
thereof will not enjoy the advantages of being a holder of a
negotiable instrument but will merely "step into the shoes" of
the person designated in the instrument and will thus be
open to all defenses available against the latter." (Campos
and Campos, Notes and Selected Cases on Negotiable
Instruments Law, Third Edition, page 38). (Emphasis
supplied)
Therefore, considering that the subject promissory note is not a negotiable
instrument, it follows that the respondent can never be a holder in due course
but remains a mere assignee of the note in question. Thus, the petitioner
may raise against the respondent all defenses available to it as against the
seller-assignor Industrial Products Marketing.
This being so, there was no need for the petitioner to implied the seller-
assignor when it was sued by the respondent-assignee because the
petitioner's defenses apply to both or either of either of them. Actually, the
records show that even the respondent itself admitted to being a mere
assignee of the promissory note in question, to wit:
ATTY. PALACA:
Did we get it right from the counsel that what
is being assigned is the Deed of Sale with
Chattel Mortgage with the promissory note
which is as testified to by the witness was
indorsed? (Counsel for Plaintiff nodding his
head.) Then we have no further questions
on cross,
COURT:
You confirm his manifestation? You are
nodding your head? Do you confirm that?
ATTY. ILAGAN:
The Deed of Sale cannot be assigned. A
deed of sale is a transaction between two
persons; what is assigned are rights, the
rights of the mortgagee were assigned to the
IFC Leasing & Acceptance Corporation.
COURT:
He puts it in a simple way as one-deed of
sale and chattel mortgage were assigned; . .
. you want to make a distinction, one is an
assignment of mortgage right and the other
one is indorsement of the promissory note.
What counsel for defendants wants is that
you stipulate that it is contained in one
single transaction?
ATTY. ILAGAN:
We stipulate it is one single transaction. (pp.
27-29, TSN., February 13, 1980).
Secondly, even conceding for purposes of discussion that the promissory
note in question is a negotiable instrument, the respondent cannot be a
holder in due course for a more significant reason.
The evidence presented in the instant case shows that prior to the sale on
installment of the tractors, there was an arrangement between the seller-
assignor, Industrial Products Marketing, and the respondent whereby the
latter would pay the seller-assignor the entire purchase price and the seller-
assignor, in turn, would assign its rights to the respondent which acquired the
right to collect the price from the buyer, herein petitioner Consolidated
Plywood Industries, Inc.
A mere perusal of the Deed of Sale with Chattel Mortgage with Promissory
Note, the Deed of Assignment and the Disclosure of Loan/Credit Transaction
shows that said documents evidencing the sale on installment of the tractors
were all executed on the same day by and among the buyer, which is herein
petitioner Consolidated Plywood Industries, Inc.; the seller-assignor which is
the Industrial Products Marketing; and the assignee-financing company,
which is the respondent. Therefore, the respondent had actual knowledge of
the fact that the seller-assignor's right to collect the purchase price was not
unconditional, and that it was subject to the condition that the tractors -sold
were not defective. The respondent knew that when the tractors turned out to
be defective, it would be subject to the defense of failure of consideration and
cannot recover the purchase price from the petitioners. Even assuming for
the sake of argument that the promissory note is negotiable, the respondent,
which took the same with actual knowledge of the foregoing facts so that its
action in taking the instrument amounted to bad faith, is not a holder in due
course. As such, the respondent is subject to all defenses which the
petitioners may raise against the seller-assignor. Any other interpretation
would be most inequitous to the unfortunate buyer who is not only saddled
with two useless tractors but must also face a lawsuit from the assignee for
the entire purchase price and all its incidents without being able to raise valid
defenses available as against the assignor.
Lastly, the respondent failed to present any evidence to prove that it had no
knowledge of any fact, which would justify its act of taking the promissory
note as not amounting to bad faith.
Sections 52 and 56 of the Negotiable Instruments Law provide that:
negotiating it.
xxx xxx xxx
SEC. 52. WHAT CONSTITUTES A HOLDER IN DUE
COURSE. — A holder in due course is a holder who has
taken the instrument under the following conditions:
xxx xxx xxx
xxx xxx xxx
(c) That he took it in good faith and for value
(d) That the time it was negotiated by him he had no notice
of any infirmity in the instrument of deffect in the title of the
person negotiating it
xxx xxx xxx
SEC. 56. WHAT CONSTITUTES NOTICE OF DEFFECT. —
To constitute notice of an infirmity in the instrument or defect
in the title of the person negotiating the same, the person to
whom it is negotiated must have had actual knowledge of
the infirmity or defect, or knowledge of such facts that his
action in taking the instrument amounts to bad faith.
(Emphasis supplied)
We subscribe to the view of Campos and Campos that a financing company
is not a holder in good faith as to the buyer, to wit:
In installment sales, the buyer usually issues a note payable
to the seller to cover the purchase price. Many times, in
pursuance of a previous arrangement with the seller, a
finance company pays the full price and the note is indorsed
to it, subrogating it to the right to collect the price from the
buyer, with interest. With the increasing frequency of
installment buying in this country, it is most probable that the
tendency of the courts in the United States to protect the
buyer against the finance company will , the finance
company will be subject to the defense of failure of
consideration and cannot recover the purchase price from
the buyer. As against the argument that such a rule would
seriously affect "a certain mode of transacting business
adopted throughout the State," a court in one case stated:
It may be that our holding here will require
some changes in business methods and will
impose a greater burden on the finance
companies. We think the buyer-Mr. & Mrs.
General Public-should have some protection
somewhere along the line. We believe the
finance company is better able to bear the
risk of the dealer's insolvency than the buyer
and in a far better position to protect his
interests against unscrupulous and insolvent
dealers. . . .
If this opinion imposes great burdens on
finance companies it is a potent argument in
favor of a rule which win afford public
protection to the general buying public
against unscrupulous dealers in personal
property. . . . (Mutual Finance Co. v. Martin,
63 So. 2d 649, 44 ALR 2d 1 [1953])
(Campos and Campos, Notes and Selected
Cases on Negotiable Instruments Law, Third
Edition, p. 128).
In the case of Commercial Credit Corporation v. Orange Country Machine
Works (34 Cal. 2d 766) involving similar facts, it was held that in a very real
sense, the finance company was a moving force in the transaction from its
very inception and acted as a party to it. When a finance company actively
participates in a transaction of this type from its inception, it cannot be
regarded as a holder in due course of the note given in the transaction.
In like manner, therefore, even assuming that the subject promissory note is
negotiable, the respondent, a financing company which actively participated
in the sale on installment of the subject two Allis Crawler tractors, cannot be
regarded as a holder in due course of said note. It follows that the
respondent's rights under the promissory note involved in this case are
subject to all defenses that the petitioners have against the seller-assignor,
Industrial Products Marketing. For Section 58 of the Negotiable Instruments
Law provides that "in the hands of any holder other than a holder in due
course, a negotiable instrument is subject to the same defenses as if it were
non-negotiable. ... "
Prescinding from the foregoing and setting aside other peripheral issues, we
find that both the trial and respondent appellate court erred in holding the
promissory note in question to be negotiable. Such a ruling does not only
violate the law and applicable jurisprudence, but would result in unjust
enrichment on the part of both the assigner- assignor and respondent
assignee at the expense of the petitioner-corporation which rightfully
rescinded an inequitable contract. We note, however, that since the seller-
assignor has not been impleaded herein, there is no obstacle for the
respondent to file a civil Suit and litigate its claims against the seller- assignor
in the rather unlikely possibility that it so desires,
WHEREFORE, in view of the foregoing, the decision of the respondent
appellate court dated July 17, 1985, as well as its resolution dated October
17, 1986, are hereby ANNULLED and SET ASIDE. The complaint against
the petitioner before the trial court is DISMISSED.
SO ORDERED.
ROMEO C. GARCIA, petitioner,
vs.
DIONISIO V. LLAMAS, respondent.
DECISION
PANGANIBAN, J.:
Novation cannot be presumed. It must be clearly shown either by the express
assent of the parties or by the complete incompatibility between the old and
the new agreements. Petitioner herein fails to show either requirement
convincingly; hence, the summary judgment holding him liable as a joint and
solidary debtor stands.
The Case
1  even accompanied by a certificate of non-forum shopping. Annexed to the
Before us is a Petition for Review under Rule 45 of the Rules of Court,
seeking to nullify the November 26, 2001 Decision2 and the June 26, 2002
Resolution3 of the Court of Appeals (CA) in CA-GR CV No. 60521. The
appellate court disposed as follows:
"UPON THE VIEW WE TAKE OF THIS CASE, THUS, the judgment
appealed from, insofar as it pertains to [Petitioner] Romeo Garcia, must be,
as it hereby is, AFFIRMED, subject to the modification that the award for
attorney’s fees and cost of suit is DELETED. The portion of the judgment that
pertains to x x x Eduardo de Jesus is SET ASIDE and VACATED.
Accordingly, the case against x x x Eduardo de Jesus is REMANDED to the
court of origin for purposes of receiving ex parte [Respondent] Dionisio
Llamas’ evidence against x x x Eduardo de Jesus."4
The challenged Resolution, on the other hand, denied petitioner’s Motion for
Reconsideration.
The Antecedents
The antecedents of the case are narrated by the CA as follows:
"This case started out as a complaint for sum of money and damages by x x
x [Respondent] Dionisio Llamas against x x x [Petitioner] Romeo Garcia and
Eduardo de Jesus. Docketed as Civil Case No. Q97-32-873, the complaint
alleged that on 23 December 1996[,] [petitioner and de Jesus] borrowed
₱400,000.00 from [respondent]; that, on the same day, [they] executed a
promissory note wherein they bound themselves jointly and severally to pay
the loan on or before 23 January 1997 with a 5% interest per month; that the
loan has long been overdue and, despite repeated demands, [petitioner and
de Jesus] have failed and refused to pay it; and that, by reason of the[ir]
unjustified refusal, [respondent] was compelled to engage the services of
counsel to whom he agreed to pay 25% of the sum to be recovered from
[petitioner and de Jesus], plus ₱2,000.00 for every appearance in court.
Annexed to the complaint were the promissory note above-mentioned and a
demand letter, dated 02 May 1997, by [respondent] addressed to [petitioner
and de Jesus].
"Resisting the complaint, [Petitioner Garcia,] in his [Answer,] averred that he
assumed no liability under the promissory note because he signed it merely
as an accommodation party for x x x de Jesus; and, alternatively, that he is
relieved from any liability arising from the note inasmuch as the loan had
been paid by x x x de Jesus by means of a check dated 17 April 1997; and
that, in any event, the issuance of the check and [respondent’s] acceptance
thereof novated or superseded the note.
"[Respondent] tendered a reply to [Petitioner] Garcia’s answer, thereunder
asserting that the loan remained unpaid for the reason that the check issued
by x x x de Jesus bounced, and that [Petitioner] Garcia’s answer was not
reply were the face of the check and the reverse side thereof.
"For his part, x x x de Jesus asserted in his [A]nswer with [C]ounterclaim that
out of the supposed ₱400,000.00 loan, he received only ₱360,000.00,
the P40,000.00 having been advance interest thereon for two months, that is,
for January and February 1997; that[,] in fact[,] he paid the sum of
₱120,000.00 by way of interests; that this was made when [respondent’s]
daughter, one Nits Llamas-Quijencio, received from the Central Police
District Command at Bicutan, Taguig, Metro Manila (where x x x de Jesus
worked), the sum of ₱40,000.00, representing the peso equivalent of his
accumulated leave credits, another ₱40,000.00 as advance interest, and still
another ₱40,000.00 as interest for the months of March and April 1997; that
he had difficulty in paying the loan and had asked [respondent] for an
extension of time; that [respondent] acted in bad faith in instituting the case,
[respondent] having agreed to accept the benefits he (de Jesus) would
receive for his retirement, but [respondent] nonetheless filed the instant case
while his retirement was being processed; and that, in defense of his rights,
he agreed to pay his counsel ₱20,000.00 [as] attorney’s fees, plus ₱1,000.00
for every court appearance.
"During the pre-trial conference, x x x de Jesus and his lawyer did not
appear, nor did they file any pre-trial brief. Neither did [Petitioner] Garcia file
a pre-trial brief, and his counsel even manifested that he would no [longer]
present evidence. Given this development, the trial court gave [respondent]
permission to present his evidence ex parte against x x x de Jesus; and, as
regards [Petitioner] Garcia, the trial court directed [respondent] to file a
motion for judgment on the pleadings, and for [Petitioner] Garcia to file his
comment or opposition thereto.
"Instead, [respondent] filed a [M]otion to declare [Petitioner] Garcia in default
and to allow him to present his evidence ex parte. Meanwhile, [Petitioner]
Garcia filed a [M]anifestation submitting his defense to a judgment on the
pleadings. Subsequently, [respondent] filed a [M]anifestation/[M]otion to
submit the case for judgement on the pleadings, withdrawing in the process
his previous motion. Thereunder, he asserted that [petitioner’s and de Jesus’]
solidary liability under the promissory note cannot be any clearer, and that
the check issued by de Jesus did not discharge the loan since the check
bounced."5
On July 7, 1998, the Regional Trial Court (RTC) of Quezon City (Branch 222)
disposed of the case as follows:
"WHEREFORE, premises considered, judgment on the pleadings is hereby
rendered in favor of [respondent] and against [petitioner and De Jesus], who
are hereby ordered to pay, jointly and severally, the [respondent] the
following sums, to wit:
‘1) ₱400,000.00 representing the principal amount plus 5% interest
thereon per month from January 23, 1997 until the same shall have
been fully paid, less the amount of ₱120,000.00 representing
interests already paid by x x x de Jesus;
‘2) ₱100,000.00 as attorney’s fees plus appearance fee of ₱2,000.00
for each day of [c]ourt appearance, and;
‘3) Cost of this suit.’"6
Ruling of the Court of Appeals
The CA ruled that the trial court had erred when it rendered a judgment on
the pleadings against De Jesus. According to the appellate court, his Answer
raised genuinely contentious issues. Moreover, he was still required to
present his evidence ex parte. Thus, respondent was not ipso facto entitled
to the RTC judgment, even though De Jesus had been declared in default.
The case against the latter was therefore remanded by the CA to the trial
court for the ex parte reception of the former’s evidence.
As to petitioner, the CA treated his case as a summary judgment, because
his Answer had failed to raise even a single genuine issue regarding any
material fact.
The appellate court ruled that no novation -- express or implied -- had taken
place when respondent accepted the check from De Jesus. According to the
CA, the check was issued precisely to pay for the loan that was covered by
the promissory note jointly and severally undertaken by petitioner and De
Jesus. Respondent’s acceptance of the check did not serve to make De
Jesus the sole debtor because, first, the obligation incurred by him and
petitioner was joint and several; and, second, the check -- which had been
intended to extinguish the obligation -- bounced upon its presentment.
Hence, this Petition.7
Issues
Petitioner submits the following issues for our consideration:
"I
Whether or not the Honorable Court of Appeals gravely erred in not holding
that novation applies in the instant case as x x x Eduardo de Jesus had
expressly assumed sole and exclusive liability for the loan obligation he
obtained from x x x Respondent Dionisio Llamas, as clearly evidenced by:
a) Issuance by x x x de Jesus of a check in payment of the full
amount of the loan of ₱400,000.00 in favor of Respondent Llamas,
although the check subsequently bounced[;]
b) Acceptance of the check by the x x x respondent x x x which
resulted in [the] substitution by x x x de Jesus or [the superseding of]
the promissory note;
c) x x x de Jesus having paid interests on the loan in the total
amount of ₱120,000.00;
d) The fact that Respondent Llamas agreed to the proposal of x x x
de Jesus that due to financial difficulties, he be given an extension of
time to pay his loan obligation and that his retirement benefits from
the Philippine National Police will answer for said obligation.
"II
Whether or not the Honorable Court of Appeals seriously erred in not holding
that the defense of petitioner that he was merely an accommodation party,
despite the fact that the promissory note provided for a joint and solidary
liability, should have been given weight and credence considering that
subsequent events showed that the principal obligor was in truth and in fact x
x x de Jesus, as evidenced by the foregoing circumstances showing his
assumption of sole liability over the loan obligation.
"III
Whether or not judgment on the pleadings or summary judgment was
properly availed of by Respondent Llamas, despite the fact that there are
genuine issues of fact, which the Honorable Court of Appeals itself admitted
in its Decision, which call for the presentation of evidence in a full-blown
trial."8
Simply put, the issues are the following: 1) whether there was novation of the
obligation; 2) whether the defense that petitioner was only an
accommodation party had any basis; and 3) whether the judgment against
him -- be it a judgment on the pleadings or a summary judgment -- was
proper.
The Court’s Ruling
The Petition has no merit.
First Issue:
Novation
Petitioner seeks to extricate himself from his obligation as joint and solidary
debtor by insisting that novation took place, either through the substitution of
De Jesus as sole debtor or the replacement of the promissory note by the
check. Alternatively, the former argues that the original obligation was
extinguished when the latter, who was his co-obligor, "paid" the loan with the
check.
The fallacy of the second (alternative) argument is all too apparent. The
check could not have extinguished the obligation, because it bounced upon
presentment. By law,9 the delivery of a check produces the effect of payment
only when it is encashed.
We now come to the main issue of whether novation took place.
Novation is a mode of extinguishing an obligation by changing its objects or
principal obligations, by substituting a new debtor in place of the old one, or
by subrogating a third person to the rights of the creditor. 10 Article 1293 of the
Civil Code defines novation as follows:
"Art. 1293. Novation which consists in substituting a new debtor in the place
of the original one, may be made even without the knowledge or against the
will of the latter, but not without the consent of the creditor. Payment by the
new debtor gives him rights mentioned in articles 1236 and 1237."
In general, there are two modes of substituting the person of the debtor: (1)
expromision and (2) delegacion. In expromision, the initiative for the change
does not come from -- and may even be made without the knowledge of --
the debtor, since it consists of a third person’s assumption of the obligation.
As such, it logically requires the consent of the third person and the creditor.
In delegacion, the debtor offers, and the creditor accepts, a third person who
consents to the substitution and assumes the obligation; thus, the consent of
these three persons are necessary.11 Both modes of substitution by the
debtor require the consent of the creditor.12
Novation may also be extinctive or modificatory. It is extinctive when an old
obligation is terminated by the creation of a new one that takes the place of
the former. It is merely modificatory when the old obligation subsists to the
extent that it remains compatible with the amendatory agreement. 13 Whether
extinctive or modificatory, novation is made either by changing the object or
the principal conditions, referred to as objective or real novation; or by
substituting the person of the debtor or subrogating a third person to the
rights of the creditor, an act known as subjective or personal novation. 14 For
novation to take place, the following requisites must concur:
1) There must be a previous valid obligation.
2) The parties concerned must agree to a new contract.
3) The old contract must be extinguished.
4) There must be a valid new contract.15
Novation may also be express or implied. It is express when the new
obligation declares in unequivocal terms that the old obligation is
extinguished. It is implied when the new obligation is incompatible with the
old one on every point.16 The test of incompatibility is whether the two
obligations can stand together, each one with its own independent
existence.17
Applying the foregoing to the instant case, we hold that no novation took
place.
The parties did not unequivocally declare that the old obligation had been
extinguished by the issuance and the acceptance of the check, or that the
check would take the place of the note. There is no incompatibility between
the promissory note and the check. As the CA correctly observed, the check
had been issued precisely to answer for the obligation. On the one hand, the
note evidences the loan obligation; and on the other, the check answers for
it. Verily, the two can stand together.
Neither could the payment of interests -- which, in petitioner’s view, also
constitutes novation18 -- change the terms and conditions of the obligation.
Such payment was already provided for in the promissory note and, like the
check, was totally in accord with the terms thereof.
Also unmeritorious is petitioner’s argument that the obligation was novated
by the substitution of debtors. In order to change the person of the debtor,
the old one must be expressly released from the obligation, and the third
person or new debtor must assume the former’s place in the relation. 19 Well-
settled is the rule that novation is never presumed. 20 Consequently, that
which arises from a purported change in the person of the debtor must be
clear and express.21 It is thus incumbent on petitioner to show clearly and
unequivocally that novation has indeed taken place.
In the present case, petitioner has not shown that he was expressly released
from the obligation, that a third person was substituted in his place, or that
the joint and solidary obligation was cancelled and substituted by the solitary
undertaking of De Jesus. The CA aptly held:
"x x x. Plaintiff’s acceptance of the bum check did not result in substitution by
de Jesus either, the nature of the obligation being solidary due to the fact that
the promissory note expressly declared that the liability of appellants
thereunder is joint and [solidary.] Reason: under the law, a creditor may
demand payment or performance from one of the solidary debtors or some or
all of them simultaneously, and payment made by one of them extinguishes
the obligation. It therefore follows that in case the creditor fails to collect from
one of the solidary debtors, he may still proceed against the other or others.
x x x "22
Moreover, it must be noted that for novation to be valid and legal, the law
requires that the creditor expressly consent to the substitution of a new
debtor.23 Since novation implies a waiver of the right the creditor had before
the novation, such waiver must be express.24 It cannot be supposed, without
clear proof, that the present respondent has done away with his right to exact
fulfillment from either of the solidary debtors.25
More important, De Jesus was not a third person to the obligation. From the
beginning, he was a joint and solidary obligor of the ₱400,000 loan; thus, he
can be released from it only upon its extinguishment. Respondent’s
acceptance of his check did not change the person of the debtor, because a
joint and solidary obligor is required to pay the entirety of the obligation.
It must be noted that in a solidary obligation, the creditor is entitled to
demand the satisfaction of the whole obligation from any or all of the
debtors.26 It is up to the former to determine against whom to enforce
collection.27 Having made himself jointly and severally liable with De Jesus,
petitioner is therefore liable28 for the entire obligation.29
Second Issue:
Accommodation Party
Petitioner avers that he signed the promissory note merely as an
accommodation party; and that, as such, he was released as obligor when
respondent agreed to extend the term of the obligation.
This reasoning is misplaced, because the note herein is not a negotiable
instrument. The note reads:
"PROMISSORY NOTE
"₱400,000.00
"RECEIVED FROM ATTY. DIONISIO V. LLAMAS, the sum of FOUR
HUNDRED THOUSAND PESOS, Philippine Currency payable on or before
January 23, 1997 at No. 144 K-10 St. Kamias, Quezon City, with interest at
the rate of 5% per month or fraction thereof.
"It is understood that our liability under this loan is jointly and severally [sic].
"Done at Quezon City, Metro Manila this 23rd day of December, 1996." 30
By its terms, the note was made payable to a specific person rather than to
bearer or to order31 -- a requisite for negotiability under Act 2031, the
Negotiable Instruments Law (NIL). Hence, petitioner cannot avail himself of
the NIL’s provisions on the liabilities and defenses of an accommodation
party. Besides, a non-negotiable note is merely a simple contract in writing
and is evidence of such intangible rights as may have been created by the
assent of the parties.32 The promissory note is thus covered by the general
provisions of the Civil Code, not by the NIL.
Even granting arguendo that the NIL was applicable, still, petitioner would be
liable for the promissory note. Under Article 29 of Act 2031, an
accommodation party is liable for the instrument to a holder for value even if,
at the time of its taking, the latter knew the former to be only an
accommodation party. The relation between an accommodation party and
the party accommodated is, in effect, one of principal and surety -- the
accommodation party being the surety.33 It is a settled rule that a surety is
bound equally and absolutely with the principal and is deemed an original
promissor and debtor from the beginning. The liability is immediate and
direct.34
Third Issue:
Propriety of Summary Judgment
or Judgment on the Pleadings
The next issue illustrates the usual confusion between a judgment on the
pleadings and a summary judgment. Under Section 3 of Rule 35 of the Rules
of Court, a summary judgment may be rendered after a summary hearing if
the pleadings, supporting affidavits, depositions and admissions on file show
that (1) except as to the amount of damages, there is no genuine issue
regarding any material fact; and (2) the moving party is entitled to a judgment
as a matter of law.
A summary judgment is a procedural device designed for the prompt
disposition of actions in which the pleadings raise only a legal, not a genuine,
issue regarding any material fact.35 Consequently, facts are asserted in the
complaint regarding which there is yet no admission, disavowal or
qualification; or specific denials or affirmative defenses are set forth in the
answer, but the issues are fictitious as shown by the pleadings, depositions
or admissions.36 A summary judgment may be applied for by either a claimant
or a defending party.37
On the other hand, under Section 1 of Rule 34 of the Rules of Court, a
judgment on the pleadings is proper when an answer fails to render an issue
or otherwise admits the material allegations of the adverse party’s pleading.
The essential question is whether there are issues generated by the
pleadings.38 A judgment on the pleadings may be sought only by a claimant,
who is the party seeking to recover upon a claim, counterclaim or cross-
claim; or to obtain a declaratory relief. 39
Apropos thereto, it must be stressed that the trial court’s judgment against
petitioner was correctly treated by the appellate court as a summary
judgment, rather than as a judgment on the pleadings. His
Answer40 apparently raised several issues -- that he signed the promissory
note allegedly as a mere accommodation party, and that the obligation was
extinguished by either payment or novation. However, these are not factual
issues requiring trial. We quote with approval the CA’s observations:
"Although Garcia’s [A]nswer tendered some issues, by way of affirmative
defenses, the documents submitted by [respondent] nevertheless clearly
showed that the issues so tendered were not valid issues. Firstly, Garcia’s
claim that he was merely an accommodation party is belied by the
promissory note that he signed. Nothing in the note indicates that he was
only an accommodation party as he claimed to be. Quite the contrary, the
promissory note bears the statement: ‘It is understood that our liability under
this loan is jointly and severally [sic].’ Secondly, his claim that his co-
defendant de Jesus already paid the loan by means of a check collapses in
view of the dishonor thereof as shown at the dorsal side of said check." 41
From the records, it also appears that petitioner himself moved to submit the
case for judgment on the basis of the pleadings and documents.1âwphi1 In a
written Manifestation,42 he stated that "judgment on the pleadings may now
be rendered without further evidence, considering the allegations and
admissions of the parties."43
In view of the foregoing, the CA correctly considered as a summary judgment
that which the trial court had issued against petitioner.
WHEREFORE, this Petition is hereby DENIED and the assailed Decision
AFFIRMED. Costs against petitioner.
SO ORDERED.
 THE HONGKONG AND SHANGHAI BANKING CORPORATION LIMITED- B. January to December 1998
PHILIPPINE BRANCHES, Petitioner,
vs. January 1998 P 3,328,305.60
COMMISSIONER OF INTERNAL REVENUE, Respondent;
February 1998 4,566,924.90
These petitions for review on certiorari1 assail the Decision2 and Resolution
dated July 8, 2004 and October 25, 2004, respectively, of the Court of March 1998 5,371,797.30
Appeals in CA-G.R. SP No. 77580, as well as the Decision 3 and Resolution April 1998 4,197,235.50
dated September 2, 2004 and April 4, 2005, respectively, of the Court of
Appeals in CA-G.R. SP No. 70814. The respective Decisions in the said May 1998 2,519,587.20
cases similarly reversed and set aside the decisions of the Court of Tax
Appeals (CTA) in CTA Case Nos. 59514 and 6009,5 respectively, and June 1998 2,301,333.00
dismissed the petitions of petitioner Hongkong and Shanghai Banking July 1998 1,586,404.50
Corporation Limited-Philippine Branches (HSBC). The corresponding
Resolutions, on the other hand, denied the respective motions for August 1998 1,787,359.50
reconsideration of the said Decisions.
September 1998 1,231,828.20
HSBC performs, among others, custodial services on behalf of its investor-
clients, corporate and individual, resident or non-resident of the Philippines, October 1998 1,303,184.40
with respect to their passive investments in the Philippines, particularly November 1998 2,026,379.70
investments in shares of stocks in domestic corporations. As a custodian
bank, HSBC serves as the collection/payment agent with respect to December 1998 2,684,097.50
dividends and other income derived from its investor-clients’ passive
investments.6 Total ₱32,904,437.30
On August 23, 1999, the Bureau of Internal Revenue (BIR), thru its then
HSBC’s investor-clients maintain Philippine peso and/or foreign currency Commissioner, Beethoven Rualo, issued BIR Ruling No. 132-99 to the effect
accounts, which are managed by HSBC through instructions given through that instructions or advises from abroad on the management of funds located
electronic messages. The said instructions are standard forms known in the in the Philippines which do not involve transfer of funds from abroad are not
banking industry as SWIFT, or "Society for Worldwide Interbank Financial subject to DST. BIR Ruling No. 132-99 reads:
Telecommunication." In purchasing shares of stock and other investment in
securities, the investor-clients would send electronic messages from abroad Date: August 23, 1999
instructing HSBC to debit their local or foreign currency accounts and to pay
FERRY TOLEDO VICTORINO GONZAGA
the purchase price therefor upon receipt of the securities. 7
& ASSOCIATES
Pursuant to the electronic messages of its investor-clients, HSBC purchased G/F AFC Building, Alfaro St.
and paid Documentary Stamp Tax (DST) from September to December 1997 Salcedo Village, Makati
and also from January to December 1998 amounting to ₱19,572,992.10 and Metro Manila
₱32,904,437.30, respectively, broken down as follows:
Attn: Atty. Tomas C. Toledo
A. September to December 1997 Tax Counsel

September 1997 P 6,981,447.90 Gentlemen:

This refers to your letter dated July 26, 1999 requesting on behalf of your
October 1997 6,209,316.60
clients, the CITIBANK & STANDARD CHARTERED BANK, for a ruling as to
November 1997 3,978,510.30 whether or not the electronic instructions involving the following transactions
of residents and non-residents of the Philippines with respect to their local or
December 1997 2,403,717.30 foreign currency accounts are subject to documentary stamp tax under
Section 181 of the 1997 Tax Code, viz:
Total ₱19,572,992.10
A. Investment purchase transactions:
An overseas client sends instruction to its bank in the Philippines to either:
(i) debit its local or foreign currency account and to pay a
named recipient in the Philippines; or
(ii) receive funds from another bank in the Philippines for
deposit into its account and to pay a named recipient in the
Philippines."
The foregoing transactions are carried out under instruction from abroad and
[do] not involve actual fund transfer since the funds are already in the
Philippine accounts. The instructions are in the form of electronic messages
(i.e., SWIFT MT100 or MT 202 and/or MT 521). In both cases, the payment
is against the delivery of investments purchased. The purchase of
investments and the payment comprise one single transaction. DST has
already been paid under Section 176 for the investment purchase.
B. Other transactions:
An overseas client sends an instruction to its bank in the Philippines to either:
(i) debit its local or foreign currency account and to pay a
named recipient, who may be another bank, a corporate
entity or an individual in the Philippines; or
(ii) receive funds from another bank in the Philippines for
deposit to its account and to pay a named recipient, who
may be another bank, a corporate entity or an individual in
the Philippines."
The above instruction is in the form of an electronic message (i.e., SWIFT
MT 100 or MT 202) or tested cable, and may not refer to any particular
transaction.
The opening and maintenance by a non-resident of local or foreign currency
accounts with a bank in the Philippines is permitted by the Bangko Sentral ng
Pilipinas, subject to certain conditions.
In reply, please be informed that pursuant to Section 181 of the 1997 Tax
Code, which provides that –
SEC. 181. Stamp Tax Upon Acceptance of Bills of Exchange and Others.–
Upon any acceptance or payment of any bill of exchange or order for the
payment of money purporting to be drawn in a foreign country but payable in
the Philippines, there shall be collected a documentary stamp tax of Thirty
centavos (P0.30) on each Two hundred pesos (₱200), or fractional part
thereof, of the face value of any such bill of exchange, or order, or Philippine
equivalent of such value, if expressed in foreign currency. (Underscoring
supplied.)
a documentary stamp tax shall be imposed on any bill of exchange or order
for payment purporting to be drawn in a foreign country but payable in the
Philippines.
Under the foregoing provision, the documentary stamp tax shall be levied on
the instrument, i.e., a bill of exchange or order for the payment of money,
which purports to draw money from a foreign country but payable in the
Philippines. In the instant case, however, while the payor is residing outside
the Philippines, he maintains a local and foreign currency account in the
Philippines from where he will draw the money intended to pay a named
recipient. The instruction or order to pay shall be made through an electronic
message, i.e., SWIFT MT 100 or MT 202 and/or MT 521. Consequently,
there is no negotiable instrument to be made, signed or issued by the payee.
In the meantime, such electronic instructions by the non-resident payor
cannot be considered as a transaction per se considering that the same do
not involve any transfer of funds from abroad or from the place where the
instruction originates. Insofar as the local bank is concerned, such instruction
could be considered only as a memorandum and shall be entered as such in
its books of accounts. The actual debiting of the payor’s account, local or
foreign currency account in the Philippines, is the actual transaction that
should be properly entered as such.
Under the Documentary Stamp Tax Law, the mere withdrawal of money from
a bank deposit, local or foreign currency account, is not subject to DST,
unless the account so maintained is a current or checking account, in which
case, the issuance of the check or bank drafts is subject to the documentary
stamp tax imposed under Section 179 of the 1997 Tax Code. In the instant
case, and subject to the physical impossibility on the part of the payor to be
present and prepare and sign an instrument purporting to pay a certain
obligation, the withdrawal and payment shall be made in cash. In this light,
the withdrawal shall not be subject to documentary stamp tax. The case is
parallel to an automatic bank transfer of local funds from a savings account
to a checking account maintained by a depositor in one bank.
Likewise, the receipt of funds from another bank in the Philippines for deposit
to the payee’s account and thereafter upon instruction of the non-resident
depositor-payor, through an electronic message, the depository bank to debit
his account and pay a named recipient shall not be subject to documentary
stamp tax.
It should be noted that the receipt of funds from another local bank in the
Philippines by a local depository bank for the account of its client residing
abroad is part of its regular banking transaction which is not subject to
documentary stamp tax. Neither does the receipt of funds makes the
recipient subject to the documentary stamp tax. The funds are deemed to be
part of the deposits of the client once credited to his account, and which,
thereafter can be disposed in the manner he wants. The payor-client’s further
instruction to debit his account and pay a named recipient in the Philippines
does not involve transfer of funds from abroad. Likewise, as stated earlier,
such debit of local or foreign currency account in the Philippines is not
subject to the documentary stamp tax under the aforementioned Section 181
of the Tax Code.
In the light of the foregoing, this Office hereby holds that the instruction made
through an electronic message by non-resident payor-client to debit his local
or foreign currency account maintained in the Philippines and to pay a certain
named recipient also residing in the Philippines is not the transaction
contemplated under Section 181 of the 1997 Tax Code. Such being the case,
such electronic instruction purporting to draw funds from a local account
intended to be paid to a named recipient in the Philippines is not subject to
documentary stamp tax imposed under the foregoing Section.
This ruling is being issued on the basis of the foregoing facts as represented.
However, if upon investigation it shall be disclosed that the facts are different,
this ruling shall be considered null and void.
Very truly yours,
(Sgd.) BEETHOVEN L. RUALO
Commissioner of Internal Revenue8
With the above BIR Ruling as its basis, HSBC filed on October 8, 1999 an
administrative claim for the refund of the amount of ₱19,572,992.10 allegedly
representing erroneously paid DST to the BIR for the period covering
September to December 1997.
Subsequently, on January 31, 2000, HSBC filed another administrative claim
for the refund of the amount of ₱32,904,437.30 allegedly representing
erroneously paid DST to the BIR for the period covering January to
December 1998.
As its claims for refund were not acted upon by the BIR, HSBC subsequently
brought the matter to the CTA as CTA Case Nos. 5951 and 6009,
respectively, in order to suspend the running of the two-year prescriptive
period.
The CTA Decisions dated May 2, 2002 in CTA Case No. 6009 and dated
December 18, 2002 in CTA Case No. 5951 favored HSBC. Respondent
Commissioner of Internal Revenue was ordered to refund or issue a tax
credit certificate in favor of HSBC in the reduced amounts of ₱30,360,570.75
in CTA Case No. 6009 and ₱16,436,395.83 in CTA Case No. 5951,
representing erroneously paid DST that have been sufficiently substantiated
with documentary evidence. The CTA ruled that HSBC is entitled to a tax
refund or tax credit because Sections 180 and 181 of the 1997 Tax Code do
not apply to electronic message instructions transmitted by HSBC’s non-
resident investor-clients:
The instruction made through an electronic message by a nonresident
investor-client, which is to debit his local or foreign currency account in the
Philippines and pay a certain named recipient also residing in the Philippines
is not the transaction contemplated in Section 181 of the Code. In this case,
the withdrawal and payment shall be made in cash. It is parallel to an
automatic bank transfer of local funds from a savings account to a checking
account maintained by a depositor in one bank. The act of debiting the
account is not subject to the documentary stamp tax under Section 181.
Neither is the transaction subject to the documentary stamp tax under
Section 180 of the same Code. These electronic message instructions
cannot be considered negotiable instruments as they lack the feature of
negotiability, which, is the ability to be transferred (Words and Phrases).
These instructions are considered as mere memoranda and entered as such
in the books of account of the local bank, and the actual debiting of the
payor’s local or foreign currency account in the Philippines is the actual
transaction that should be properly entered as such. 9
The respective dispositive portions of the Decisions dated May 2, 2002 in
CTA Case No. 6009 and dated December 18, 2002 in CTA Case No. 5951
read:
II. CTA Case No. 6009
WHEREFORE, in the light of all the foregoing, the instant Petition for Review
is PARTIALLY GRANTED. Respondent is hereby ORDERED to REFUND or
ISSUE A TAX CREDIT CERTIFICATE in favor of Petitioner the amount of
₱30,360,570.75 representing erroneous payment of documentary stamp tax
for the taxable year 1998.10
II. CTA Case No. 5951
WHEREFORE, in the light of the foregoing, the instant petition is hereby
partially granted. Accordingly, respondent is hereby ORDERED to REFUND,
or in the alternative, ISSUE A TAX CREDIT CERTIFICATE in favor of the
petitioner in the reduced amount of ₱16,436,395.83 representing erroneously
paid documentary stamp tax for the months of September 1997 to December
1997.11
However, the Court of Appeals reversed both decisions of the CTA and ruled
that the electronic messages of HSBC’s investor-clients are subject to DST.
The Court of Appeals explained:
At bar, [HSBC] performs custodial services in behalf of its investor-clients as
regards their passive investments in the Philippines mainly involving shares
of stocks in domestic corporations. These investor-clients maintain Philippine
peso and/or foreign currency accounts with [HSBC]. Should they desire to
purchase shares of stock and other investments securities in the Philippines,
the investor-clients send their instructions and advises via electronic
messages from abroad to [HSBC] in the form of SWIFT MT 100, MT 202, or
MT 521 directing the latter to debit their local or foreign currency account and
to pay the purchase price upon receipt of the securities (CTA Decision, pp. 1-
2; Rollo, pp. 41-42). Pursuant to Section 181 of the NIRC, [HSBC] was thus drawer relationship with its client-investor through the execution of a specific
required to pay [DST] based on its acceptance of these electronic messages instrument which, in the case at bar, is the acceptance of the order for
– which, as [HSBC] readily admits in its petition filed before the [CTA], were payment of money. The acceptance of a bill or order for payment may be
essentially orders to pay the purchases of securities made by its client- done in writing by the drawee in the bill or order itself, or in a separate
investors (Rollo, p. 60). instrument (Prudential Bank vs. Intermediate Appellate Court, supra.)Here,
[HSBC]’s acceptance of the orders for the payment of money was veritably
Appositely, the BIR correctly and legally assessed and collected the [DST]
‘done in writing in a separate instrument’ each time it debited the local or
from [HSBC] considering that the said tax was levied against the
foreign currency accounts of its client-investors pursuant to the latter’s
acceptances and payments by [HSBC] of the subject electronic
instructions and advises sent by electronic messages to [HSBC]. The [DST]
messages/orders for payment. The issue of whether such electronic
therefore must be paid upon the execution of the specified instruments or
messages may be equated as a written document and thus be subject to tax
facilities covered by the tax – in this case, the acceptance by [HSBC] of the
is beside the point. As We have already stressed, Section 181 of the law
order for payment of money sent by the client-investors through electronic
cited earlier imposes the [DST] not on the bill of exchange or order for
messages. x x x.12
payment of money but on the acceptance or payment of the said bill or order.
The acceptance of a bill or order is the signification by the drawee of its Hence, these petitions.
assent to the order of the drawer to pay a given sum of money while payment
HSBC asserts that the Court of Appeals committed grave error when it
implies not only the assent to the said order of the drawer and a recognition
disregarded the factual and legal conclusions of the CTA. According to
of the drawer’s obligation to pay such aforesaid sum, but also a compliance
HSBC, in the absence of abuse or improvident exercise of authority, the
with such obligation (Philippine National Bank vs. Court of Appeals, 25 SCRA
CTA’s ruling should not have been disturbed as the CTA is a highly
693 [1968]; Prudential Bank vs. Intermediate Appellate Court, 216 SCRA 257
specialized court which performs judicial functions, particularly for the review
[1992]). What is vital to the valid imposition of the [DST] under Section 181 is
of tax cases. HSBC further argues that the Commissioner of Internal
the existence of the requirement of acceptance or payment by the drawee (in
Revenue had already settled the issue on the taxability of electronic
this case, [HSBC]) of the order for payment of money from its investor-clients
messages involved in these cases in BIR Ruling No. 132-99 and reiterated in
and that the said order was drawn from a foreign country and payable in the
BIR Ruling No. DA-280-2004.13
Philippines. These requisites are surely present here.
The Commissioner of Internal Revenue, on the other hand, claims that
It would serve the parties well to understand the nature of the tax being
Section 181 of the 1997 Tax Code imposes DST on the acceptance or
imposed in the case at bar. In Philippine Home Assurance Corporation vs.
payment of a bill of exchange or order for the payment of money. The DST
Court of Appeals (301 SCRA 443 [1999]), the Supreme Court ruled that [DST
under Section 18 of the 1997 Tax Code is levied on HSBC’s exercise of a
is] levied on the exercise by persons of certain privileges conferred by law for
privilege which is specifically taxed by law. BIR Ruling No. 132-99 is
the creation, revision, or termination of specific legal relationships through
inconsistent with prevailing law and long standing administrative practice,
the execution of specific instruments, independently of the legal status of the
respondent is not barred from questioning his own revenue ruling. Tax
transactions giving rise thereto. In the same case, the High Court also
refunds like tax exemptions are strictly construed against the taxpayer. 14
declared – citing Du Pont vs. United States (300 U.S. 150, 153 [1936])
The Court finds for HSBC.
The tax is not upon the business transacted but is an excise upon the
privilege, opportunity, or facility offered at exchanges for the transaction of The Court agrees with the CTA that the DST under Section 181 of the Tax
the business. It is an excise upon the facilities used in the transaction of the Code is levied on the acceptance or payment of "a bill of exchange
business separate and apart from the business itself. x x x. purporting to be drawn in a foreign country but payable in the Philippines"
and that "a bill of exchange is an unconditional order in writing addressed by
To reiterate, the subject [DST] was levied on the acceptance and payment
one person to another, signed by the person giving it, requiring the person to
made by [HSBC] pursuant to the order made by its client-investors as
whom it is addressed to pay on demand or at a fixed or determinable future
embodied in the cited electronic messages, through which the herein parties’
time a sum certain in money to order or to bearer." A bill of exchange is one
privilege and opportunity to transact business respectively as drawee and
of two general forms of negotiable instruments under the Negotiable
drawers was exercised, separate and apart from the circumstances and
Instruments Law.15
conditions related to such acceptance and subsequent payment of the sum
of money authorized by the concerned drawers. Stated another way, the The Court further agrees with the CTA that the electronic messages of
[DST] was exacted on [HSBC’s] exercise of its privilege under its drawee- HSBC’s investor-clients containing instructions to debit their respective local
or foreign currency accounts in the Philippines and pay a certain named
recipient also residing in the Philippines is not the transaction contemplated
under Section 181 of the Tax Code as such instructions are "parallel to an
automatic bank transfer of local funds from a savings account to a checking
account maintained by a depositor in one bank." The Court favorably adopts
the finding of the CTA that the electronic messages "cannot be considered
negotiable instruments as they lack the feature of negotiability, which, is the
ability to be transferred" and that the said electronic messages are "mere
memoranda" of the transaction consisting of the "actual debiting of the
[investor-client-payor’s] local or foreign currency account in the Philippines"
and "entered as such in the books of account of the local bank," HSBC. 16
More fundamentally, the instructions given through electronic messages that
are subjected to DST in these cases are not negotiable instruments as they
do not comply with the requisites of negotiability under Section 1 of the
Negotiable Instruments Law, which provides:
Sec. 1. Form of negotiable instruments.– An instrument to be negotiable
must conform to the following requirements:
(a) It must be in writing and signed by the maker or drawer;
(b) Must contain an unconditional promise or order to pay a sum
certain in money;
(c) Must be payable on demand, or at a fixed or determinable future
time;
(d) Must be payable to order or to bearer; and
(e) Where the instrument is addressed to a drawee, he must be
named or otherwise indicated therein with reasonable certainty.
The electronic messages are not signed by the investor-clients as supposed
drawers of a bill of exchange; they do not contain an unconditional order to
pay a sum certain in money as the payment is supposed to come from a
specific fund or account of the investor-clients; and, they are not payable to
order or bearer but to a specifically designated third party. Thus, the
electronic messages are not bills of exchange. As there was no bill of
exchange or order for the payment drawn abroad and made payable here in
the Philippines, there could have been no acceptance or payment that will
trigger the imposition of the DST under Section 181 of the Tax Code.
Section 181 of the 1997 Tax Code, which governs HSBC’s claim for tax
refund for taxable year 1998 subject of G.R. No. 167728, provides:
SEC. 181. Stamp Tax Upon Acceptance of Bills of Exchange and Others. –
Upon any acceptance or payment of any bill of exchange or order for the
payment of money purporting to be drawn in a foreign country but payable in
the Philippines, there shall be collected a documentary stamp tax of Thirty
centavos (P0.30) on each Two hundred pesos (₱200), or fractional part
thereof, of the face value of any such bill of exchange, or order, or the
Philippine equivalent of such value, if expressed in foreign currency.
(Emphasis supplied.)
Section 230 of the 1977 Tax Code, as amended, which governs HSBC’s
claim for tax refund for DST paid during the period September to December
1997 and subject of G.R. No. 166018, is worded exactly the same as its
counterpart provision in the 1997 Tax Code quoted above.
The origin of the above provision is Section 117 of the Tax Code of
1904,17 which provided: SECTION 117. The acceptor or acceptors of any bill
of exchange or order for the payment of any sum of money drawn or
purporting to be drawn in any foreign country but payable in the Philippine
Islands, shall, before paying or accepting the same, place thereupon a stamp
in payment of the tax upon such document in the same manner as is
required in this Act for the stamping of inland bills of exchange or promissory
notes, and no bill of exchange shall be paid nor negotiated until such stamp
shall have been affixed thereto.18 (Emphasis supplied.)
It then became Section 30(h) of the 1914 Tax Code 19:
SEC. 30. Stamp tax upon documents and papers. – Upon documents,
instruments, and papers, and upon acceptances, assignments, sales, and
transfers of the obligation, right, or property incident thereto documentary
taxes for and in respect of the transaction so had or accomplished shall be
paid as hereinafter prescribed, by the persons making, signing, issuing,
accepting, or transferring the same, and at the time such act is done or
transaction had:
xxxx
(h) Upon any acceptance or payment upon acceptance of any bill of
exchange or order for the payment of money purporting to be drawn in a
foreign country but payable in the Philippine Islands, on each two hundred
pesos, or fractional part thereof, of the face value of any such bill of
exchange or order, or the Philippine equivalent of such value, if expressed in
foreign currency, two centavos[.] (Emphasis supplied.)
It was implemented by Section 46 in relation to Section 39 of Revenue
Regulations No. 26,20 as amended:
SEC. 39. A Bill of Exchange is one that "denotes checks, drafts, and all other
kinds of orders for the payment of money, payable at sight or on demand, or
after a specific period after sight or from a stated date."
SEC. 46. Bill of Exchange, etc. – When any bill of exchange or order for the
payment of money drawn in a foreign country but payable in this country
whether at sight or on demand or after a specified period after sight or from a
stated date, is presented for acceptance or payment, there must be affixed
upon acceptance or payment of documentary stamp equal to P0.02 for each
₱200 or fractional part thereof. (Emphasis supplied.)
It took its present form in Section 218 of the Tax Code of 1939, 21 which
provided:
SEC. 218. Stamp Tax Upon Acceptance of Bills of Exchange and Others. –
Upon any acceptance or payment of any bill of exchange or order for the
payment of money purporting to be drawn in a foreign country but payable in
the Philippines, there shall be collected a documentary stamp tax of four
centavos on each two hundred pesos, or fractional part thereof, of the face
value of any such bill of exchange or order, or the Philippine equivalent of
such value, if expressed in foreign currency. (Emphasis supplied.)
It then became Section 230 of the 1977 Tax Code, 22 as amended by
Presidential Decree Nos. 1457 and 1959,which, as stated earlier, was
worded exactly as Section 181 of the current Tax Code:
SEC. 230. Stamp tax upon acceptance of bills of exchange and others. –
Upon any acceptance or payment of any bill of exchange or order for the
payment of money purporting to be drawn in a foreign country but payable in
the Philippines, there shall be collected a documentary stamp tax of thirty
centavos on each two hundred pesos, or fractional part thereof, of the face
value of any such bill of exchange, or order, or the Philippine equivalent of
such value, if expressed in foreign currency. (Emphasis supplied.)
The pertinent provision of the present Tax Code has therefore remained
substantially the same for the past one hundred years.1âwphi1 The identical
text and common history of Section 230 of the 1977 Tax Code, as amended,
and the 1997 Tax Code, as amended, show that the law imposes DST on
either (a) the acceptance or (b) the payment of a foreign bill of exchange or
order for the payment of money that was drawn abroad but payable in the
Philippines.
DST is an excise tax on the exercise of a right or privilege to transfer
obligations, rights or properties incident thereto.23 Under Section 173 of the
1997 Tax Code, the persons primarily liable for the payment of the DST are
those (1) making, (2) signing, (3) issuing, (4) accepting, or (5) transferring the
taxable documents, instruments or papers.24
In general, DST is levied on the exercise by persons of certain privileges
conferred by law for the creation, revision, or termination of specific legal
relationships through the execution of specific instruments. Examples of such
privileges, the exercise of which, as effected through the issuance of
particular documents, are subject to the payment of DST are leases of lands,
mortgages, pledges and trusts, and conveyances of real property. 25
As stated above, Section 230 of the 1977 Tax Code, as amended, now
Section 181 of the 1997 Tax Code, levies DST on either (a) the acceptance
or (b) the payment of a foreign bill of exchange or order for the payment of
money that was drawn abroad but payable in the Philippines. In other words,
it levies DST as an excise tax on the privilege of the drawee to accept or pay
a bill of exchange or order for the payment of money, which has been drawn
abroad but payable in the Philippines, and on the corresponding privilege of
the drawer to have acceptance of or payment for the bill of exchange or order
for the payment of money which it has drawn abroad but payable in the
Philippines.
Acceptance applies only to bills of exchange.26 Acceptance of a bill of
exchange has a very definite meaning in law.27 In particular, Section 132 of
the Negotiable Instruments Law provides:
Sec. 132. Acceptance; how made, by and so forth. – The acceptance of a bill
[of exchange28] is the signification by the drawee of his assent to the order of
the drawer. The acceptance must be in writing and signed by the drawee. It
must not express that the drawee will perform his promise by any other
means than the payment of money.
Under the law, therefore, what is accepted is a bill of exchange, and the
acceptance of a bill of exchange is both the manifestation of the drawee’s
consent to the drawer’s order to pay money and the expression of the
drawee’s promise to pay. It is "the act by which the drawee manifests his
consent to comply with the request contained in the bill of exchange directed
to him and it contemplates an engagement or promise to pay." 29 Once the
drawee accepts, he becomes an acceptor.30 As acceptor, he engages to pay
the bill of exchange according to the tenor of his acceptance. 31
Acceptance is made upon presentment of the bill of exchange, or within 24
hours after such presentment.32 Presentment for acceptance is the
production or exhibition of the bill of exchange to the drawee for the purpose
of obtaining his acceptance.33
Presentment for acceptance is necessary only in the instances where the law
requires it.34 In the instances where presentment for acceptance is not
necessary, the holder of the bill of exchange can proceed directly to
presentment for payment.
Presentment for payment is the presentation of the instrument to the person
primarily liable for the purpose of demanding and obtaining payment
thereof.35
Thus, whether it be presentment for acceptance or presentment for payment,
the negotiable instrument has to be produced and shown to the drawee for
acceptance or to the acceptor for payment.
Revenue Regulations No. 26 recognizes that the acceptance or payment (of
bills of exchange or orders for the payment of money that have been drawn
abroad but payable in the Philippines) that is subjected to DST under Section
181 of the 1997 Tax Code is done after presentment for acceptance or
presentment for payment, respectively. In other words, the acceptance or
payment of the subject bill of exchange or order for the payment of money is
done when there is presentment either for acceptance or for payment of the
bill of exchange or order for the payment of money.
Applying the above concepts to the matter subjected to DST in these cases,
the electronic messages received by HSBC from its investor-clients abroad
instructing the former to debit the latter's local and foreign currency accounts
and to pay the purchase price of shares of stock or investment in securities
do not properly qualify as either presentment for acceptance or presentment
for payment. There being neither presentment for acceptance nor
presentment for payment, then there was no acceptance or payment that
could have been subjected to DST to speak of.
Indeed, there had been no acceptance of a bill of exchange or order for the
payment of money on the part of HSBC. To reiterate, there was no bill of
exchange or order for the payment drawn abroad and made payable here in
the Philippines. Thus, there was no acceptance as the electronic messages
did not constitute the written and signed manifestation of HSBC to a drawer's
order to pay money. As HSBC could not have been an acceptor, then it could
not have made any payment of a bill of exchange or order for the payment of
money drawn abroad but payable here in the Philippines. In other words,
HSBC could not have been held liable for DST under Section 230 of the
1977 Tax Code, as amended, and Section 181 of the 1997 Tax Code as it is
not "a person making, signing, issuing, accepting, or, transferring" the
taxable instruments under the said provision. Thus, HSBC erroneously paid
DST on the said electronic messages for which it is entitled to a tax refund.
WHEREFORE, the petitions are hereby GRANTED and the Decisions dated
May 2, 2002 in CTA Case No. 6009 and dated December 18, 2002 in CTA
Case No. 5951 of the Court of Tax Appeals are REINSTATED.
SO ORDERED.