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Republic of the Philippines SUPREME COURT Manila FIRST DIVISION G.R. No. 166018 June 4, 2014 THE HONGKONG AND SHANGHAI BANKING CORPORATION LIMITED-PHILIPPINE BRANCHES, Petitioner, vs. COMMISSIONER OF INTERNAL REVENUE, Respondent; x - - - - - - - - - - - - - - - - - - - - - - - x G.R. No. 167728 THE HONGKONG AND SHANGHAI BANKING CORPORATION LIMITED-PHILIPPINE BRANCHES, Petitioner, vs. COMMISSIONER OF INTERNAL REVENUE, Respondent. D E C I S I O N LEONARDO-DE CASTRO, J.: These petitions for review on certiorari1 assail the Decision2 and Resolution dated July 8, 2004 and October 25, 2004, respectively, of the Court of Appeals in CA-G.R. SP No. 77580, as well as the Decision3 and Resolution dated September 2, 2004 and April 4, 2005, respectively, of the Court of Appeals in CA- G.R. SP No. 70814. The respective Decisions in the said cases similarly reversed and set aside the decisions of the Court of Tax Appeals (CTA) in CTA Case Nos. 59514 and 6009,5 respectively, and dismissed the petitions of petitioner Hongkong and Shanghai Banking Corporation Limited-Philippine Branches (HSBC). The corresponding Resolutions, on the other hand, denied the respective motions for reconsideration of the said Decisions. HSBC performs, among others, custodial services on behalf of its investor-clients, corporate and individual, resident or non- resident of the Philippines, with respect to their passive investments in the Philippines, particularly investments in shares of stocks in domestic corporations. As a custodian bank, HSBC serves as the collection/payment agent with respect to dividends and other income derived from its investor-clients’ passive investments.6 HSBC’s investor-clients maintain Philippine peso and/or foreign currency accounts, which are managed by HSBC through instructions given through electronic messages. The said instructions are standard forms known in the banking industry as SWIFT, or "Society for Worldwide Interbank Financial Telecommunication." In purchasing shares of stock and other investment in securities, the investor-clients would send electronic messages from abroad instructing HSBC to debit their local or foreign currency accounts and to pay the purchase price therefor upon receipt of the securities.7 Pursuant to the electronic messages of its investor-clients, HSBC purchased and paid Documentary Stamp Tax (DST) from September to December 1997 and also from January to December 1998 amounting to P19,572,992.10 and P32,904,437.30, respectively, broken down as follows: A. September to December 1997 September 1997 P 6,981,447.90 October 1997 6,209,316.60 November 1997 3,978,510.30 December 1997 2,403,717.30 Total P19,572,992.10 B. January to December 1998 January 1998 P 3,328,305.60 February 1998 4,566,924.90 March 1998 5,371,797.30 April 1998 4,197,235.50 May 1998 2,519,587.20 June 1998 2,301,333.00 July 1998 1,586,404.50 August 1998 1,787,359.50 September 1998 1,231,828.20 October 1998 1,303,184.40 November 1998 2,026,379.70 December 1998 2,684,097.50 Total P32,904,437.30 On August 23, 1999, the Bureau of Internal Revenue (BIR), thru its then Commissioner, Beethoven Rualo, issued BIR Ruling No. 132-99 to the effect that instructions or advises from abroad on the management of funds located in the Philippines which do not involve transfer of funds from abroad are not subject to DST. BIR Ruling No. 132-99 reads: Date: August 23, 1999 FERRY TOLEDO VICTORINO GONZAGA

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Republic of the Philippines

SUPREME COURT

Manila

FIRST DIVISION

G.R. No. 166018 June 4, 2014

THE HONGKONG AND SHANGHAI BANKING CORPORATION LIMITED-PHILIPPINE BRANCHES, Petitioner,

vs.

COMMISSIONER OF INTERNAL REVENUE, Respondent;

x - - - - - - - - - - - - - - - - - - - - - - - x

G.R. No. 167728

THE HONGKONG AND SHANGHAI BANKING CORPORATION LIMITED-PHILIPPINE BRANCHES, Petitioner,

vs.

COMMISSIONER OF INTERNAL REVENUE, Respondent.

D E C I S I O N

LEONARDO-DE CASTRO, J.:

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

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

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

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

A. September to December 1997

September 1997P 6,981,447.90

October 19976,209,316.60

November 19973,978,510.30

December 19972,403,717.30

TotalP19,572,992.10

B. January to December 1998

January 1998P 3,328,305.60

February 19984,566,924.90

March 19985,371,797.30

April 19984,197,235.50

May 19982,519,587.20

June 19982,301,333.00

July 19981,586,404.50

August 19981,787,359.50

September 19981,231,828.20

October 19981,303,184.40

November 19982,026,379.70

December 19982,684,097.50

TotalP32,904,437.30

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

Date: August 23, 1999

FERRY TOLEDO VICTORINO GONZAGA

& ASSOCIATES

G/F AFC Building, Alfaro St.

Salcedo Village, Makati

Metro Manila

Attn: Atty. Tomas C. Toledo

Tax Counsel

Gentlemen:

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

A. Investment purchase transactions:

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

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

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

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

B. Other transactions:

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

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

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

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

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

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

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

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 payors 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 payees 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-clients 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 P19,572,992.10 allegedly representing erroneously paid DST to the BIR for the period covering September to December 1997.

Subsequently, on January 31, 2000, HSBC filed another administrative claim for the refund of the amount of P32,904,437.30 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 P30,360,570.75 in CTA Case No. 6009 and P16,436,395.83 in CTA Case No. 5951, representing erroneously paid DST that have been sufficiently substantiated with documentary evidence. The CTA ruled that HSBC is entitled to a tax refund or tax credit because Sections 180 and 181 of the 1997 Tax Code do not apply to electronic message instructions transmitted by HSBCs 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 payors local or foreign currency account in the Philippines is the actual transaction that should be properly entered as such.9

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

II. CTA Case No. 6009

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

II. CTA Case No. 5951

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

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

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

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

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

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

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

Hence, these petitions.

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

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

The Court finds for HSBC.

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

The Court further agrees with the CTA that the electronic messages of HSBCs 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-payors] 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 HSBCs claim for tax refund for taxable year 1998 subject of G.R. No. 167728, provides:

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

Section 230 of the 1977 Tax Code, as amended, which governs HSBCs claim for tax refund for DST paid during the period September to December 1997 and subject of G.R. No. 166018, is worded exactly the same as its counterpart provision in the 1997 Tax Code quoted above.

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

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

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

x x x x

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

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

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

SEC. 46. Bill of Exchange, etc. When any bill of exchange or order for the payment of money drawn in a foreign country but payable in this country whether at sight or on demand or after a specified period after sight or from a stated date, is presented for acceptance or payment, there must be affixed upon acceptance or payment of documentary stamp equal to P0.02 for each P200 or fractional part thereof. (Emphasis supplied.)

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

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

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

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

The pertinent provision of the present Tax Code has therefore remained substantially the same for the past one hundred years.1wphi1 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 drawees consent to the drawers order to pay money and the expression of the drawees 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 CT A Case No. 5951 of the Court of Tax Appeals are REINSTATED.

SO ORDERED.

Republic of thePhilippines

Supreme Court

Manila

THIRD DIVISION

PHILIPPINE NATIONAL BANK,G.R. No. 170325

Petitioner,

Present:

YNARES-SANTIAGO,J.,

Chairperson,

-versus-AUSTRIA-MARTINEZ,

CHICO-NAZARIO,

NACHURA,and

REYES,JJ.

ERLANDO T. RODRIGUEZPromulgated:

andNORMA RODRIGUEZ,

Respondents.September 26, 2008

x - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - x

D E C I S I O N

REYES, R.T.,J.:

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

These questions seek answers in this petition for review oncertiorariof the Amended Decision[1]of the Court of Appeals (CA) which affirmed with modification that of the Regional Trial Court (RTC).[2]

The Facts

The facts as borne by the records are as follows:

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

The spouses were engaged in the informal lending business.In line with their business, they had a discounting[3]arrangement with the Philnabank Employees Savings and Loan Association (PEMSLA), an association ofPNBemployees.Naturally, PEMSLA was likewise a client ofPNBAmelia Avenue Branch.The association maintained current and savings accounts with petitioner bank.

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

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

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

Meanwhile, the Rodriguez checks were deposited directly by PEMSLA to its savings accountwithout any indorsementfrom the named payees.This was an irregular procedure made possible through the facilitation of Edmundo Palermo, Jr., treasurer of PEMSLA and bank teller in thePNBBranch.It appears that this became the usual practice for the parties.

For the period November 1998 to February 1999, the spouses issued sixty nine (69) checks, in the total amount ofP2,345,804.00.These were payable to forty seven (47) individual payees who were all members of PEMSLA.[4]

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

RTC Disposition

Alarmed over the unexpected turn of events, the spouses Rodriguez filed a civil complaint for damages against PEMSLA, the Multi-Purpose Cooperative of Philnabankers (MCP), and petitioner PNB.They sought to recover the value of their checks that were deposited to the PEMSLA savings account amounting toP2,345,804.00.The spouses contended that becausePNBcredited the checks to the PEMSLA account even without indorsements,PNBviolated its contractual obligation to them as depositors.PNBpaid the wrong payees, hence, it should bear the loss.

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

In an Order datedJanuary 12, 2000, theRTCdeniedPNBs motion to dismiss.

In its Answer,[5]PNBclaimed it is not liable for the checks which it paid to the PEMSLA account without any indorsement from the payees.The bank contended that spouses Rodriguez, the makers,actuallydid not intend for the named payees to receive the proceeds of the checks.Consequently, the payees were considered asfictitious payeesas defined under the Negotiable Instruments Law (NIL).Being checks made to fictitious payees which are bearer instruments, the checks were negotiable by mere delivery.PNBs Answer includedits cross-claim against its co-defendants PEMSLA and the MCP, praying that in the event that judgment is rendered against the bank,the cross-defendants should be ordered to reimbursePNBthe amount it shall pay.

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

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

1.Defendant is hereby ordered to pay the plaintiffs the total amount ofP2,345,804.00 or reinstate or restore the amount ofP775,337.00 in the PNBig Demand Deposit Checking/Current Account No. 810480-4 of Erlando T. Rodriguez, and the amount ofP1,570,467.00 in the PNBig Demand Deposit, Checking/Current Account No. 810624-6 of Erlando T. Rodriguez and/or Norma Rodriguez, plus legal rate of interest thereon to be computed from the filing of this complaint until fully paid;

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

(a)Consequential damages, unearned income in the amount ofP4,000,000.00, as a result of their having incurred great dificulty (sic) especially in the residential subdivision business, which was not pushed through and the contractor even threatened to file a case against the plaintiffs;

(b)Moral damages in the amount ofP1,000,000.00;

(c)Exemplary damages in the amount ofP500,000.00;

(d)Attorneys fees in the amount ofP150,000.00 considering that this case does not involve very complicated issues; and for the

(e)Costs of suit.

3.Other claims and counterclaims are hereby dismissed.[6]

CA Disposition

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

In a Decision[7]datedJuly 22, 2004, the CA reversed and set aside theRTCdisposition.The CA concluded that the checks were obviously meant by the spouses to be really paid to PEMSLA.The courta quodeclared:

We are not swayed by the contention of the plaintiffs-appellees (Spouses Rodriguez) that their cause of action arose from the alleged breach of contract by the defendant-appellant (PNB) when it paid the value of the checks to PEMSLA despite the checks being payable to order.Rather, we are more convinced by the strong and credible evidence for the defendant-appellant with regard to the plaintiffs-appellees and PEMSLAs business arrangement that the value of the rediscounted checks of the plaintiffs-appellees would be deposited in PEMSLAs account for payment of the loans it has approved in exchange for PEMSLAs checks with the full value of the said loans.This is the only obvious explanation as to why all the disputed sixty-nine (69) checks were in the possession of PEMSLAs errand boy for presentment to the defendant-appellantthat led to this present controversy.It also appears that the teller who accepted the said checks was PEMSLAs officer, and that such was a regular practice by the parties until the defendant-appellant discovered the scam.The logical conclusion, therefore, is that the checks were never meant to be paid to order, but instead, to PEMSLA.We thus find no breach of contract on the part of the defendant-appellant.

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

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

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

OnOctober 11, 2005, the CAreverseditself via an Amended Decision, the last paragraph andfalloof which read:

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

1.Actual damages in the amount ofP2,345,804 with interest at 6% per annum from14 May 1999until fully paid;

2.Moral damages in the amount ofP200,000;

3.Attorneys fees in the amount ofP100,000; and

4.Costs of suit.

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

SO ORDERED.[9]

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

Hence, the present recourse under Rule 45.

Issues

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

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

Our Ruling

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

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

Now to the core of the petition.

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

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

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

(b)The drawer or maker; or

(c)The drawee; or

(d)Two or more payees jointly; or

(e)One or some of several payees; or

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

Consequently, a transferees lapse of wary vigilance, disregard of suspicious circumstances which might have well induced a prudent banker to investigate and other permutations of negligence are not relevant considerations under Section 3-405 x x x.Rather, there is a commercial bad faith exception to UCC 3-405, applicable when the transferee acts dishonestly where it has actual knowledge of facts and circumstances that amount to bad faith, thus itself becoming a participant in a fraudulent scheme.x x xSuch a test finds support in the text of the Code, which omits a standard of care requirement from UCC 3-405 but imposes on all parties an obligation to act with honesty in fact.x x x[19](Emphasis added)

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

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

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

For the fictitious-payee rule to be available as a defense,PNBmust show that the makers did not intend for the named payees to be part of the transaction involving the checks.At most, the banks thesis shows that the payees did not have knowledge of the existence of the checks.This lack of knowledge on the part of the payees, however, was not tantamount to a lack of intention on the part of respondents-spouses that the payees would not receive the checks proceeds.Considering that respondents-spouses were transacting with PEMSLA and not the individual payees, it is understandable that they relied on the information given by the officers of PEMSLA that the payees would be receiving the checks.

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

Because of afailureto show that the payees were fictitious in its broader sense, the fictitious-payee rule doesnotapply.Thus, the checks are to be deemed payable to order.Consequently, the drawee bank bears the loss.[20]

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

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

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

In the case at bar, respondents-spouses were the banks depositors. The checks were drawn against respondents-spouses accounts.PNB, as the drawee bank, had the responsibility to ascertain the regularity of the indorsements, and the genuineness ofthe signatures on the checks before accepting them for deposit.Lastly,PNBwas obligated to pay the checks in strict accordance with the instructions of the drawers.Petitioner miserably failed to discharge this burden.

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

Moreover,PNBwas negligent in the selection and supervision of its employees.The trustworthiness of bank employees is indispensable to maintain the stability of the banking industry.Thus, banks are enjoined to be extra vigilant in the management and supervision of their employees.InBank of the PhilippineIslandsv. Court of Appeals,[25]this Court cautioned thus:

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

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

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

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

One Last Note

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

ToPNBs credit, it became involved in the controversial transaction not of its own volition but due to the actions of some of its employees.Considering that moral damages must be understood to be in concept of grants, not punitive or corrective in nature, We resolve to reduce the award of moral damages toP50,000.00.[29]

WHEREFORE, the appealed Amended Decision isAFFIRMED with the MODIFICATIONthat the award for moral damages is reduced toP50,000.00, and that this is without prejudice to whatever civil, criminal, or administrative action PNB might take against PEMSLA, MPC, and the employees involved.

SO ORDERED.

Republic of the Philippines

SUPREME COURT

Manila

SECOND DIVISION

G.R. No. 156903 November 24, 2006

SPOUSES CARLOS and TERESITA RUSTIA, Petitioners,

vs.

EMERITA RIVERA, Respondent.

D E C I S I O N

SANDOVAL-GUTIERREZ, J.:

For our resolution is the instant Petition for Review on Certiorari under Rule 45 of the 1997 Rules of Civil Procedure, as amended, assailing the Decision1 of the Court of Appeals, dated August 29, 2002, in CA-G.R. SP No. 63265.

In September 1995, Emerita Rivera, respondent, filed with the Metropolitan Trial Court (MeTC), Branch 36, Quezon City, a complaint for sum of money against spouses Carlos and Teresita Rustia, petitioners, and Rosemarie F. Rocha. The complaint was docketed as Civil Case No. 0206. Respondent alleged therein that petitioners obtained from her a loan of P130,000.00, payable within thirty (30) days without need of prior demand. As security for the loan, petitioners executed a promissory note, with Rosemarie Rocha as their co-maker. The loan bears an interest of five percent (5%) per month. Petitioners paid the interest corresponding to the period from January 1991 to March 1994. Thereafter, despite respondents written demands, they failed to pay any interest or the principal obligation. Respondent then prayed that judgment be rendered ordering petitioners to pay the loan, the accrued interest thereon, and attorneys fees.

After the courts denial of their motion to dismiss the complaint, petitioners filed their answer admitting that respondent extended to them a loan of P130,000.00. However, they denied having agreed to pay interest thereon. While they paid respondent P6,500.00 every month, however, it was for the settlement of the principal obligation. In fact, they overpaid P123,500.00. They prayed that the case be dismissed and that respondent be ordered to refund to them their overpayment plus damages, attorneys fees, and litigation expenses.

During the hearing, respondent offered in evidence petitioners promissory note and petitioner Teresita Rustias letter addressed to respondent agreeing to pay 5% monthly interest.

Teresita denied having borrowed P130,000.00 from respondent; that respondent delivered the said amount to petitioners as investment in the latters business; and that the monthly payment of P6,500.00 they tendered to respondent corresponds to her share in the profits.

On June 11, 1999, the trial court rendered its Decision,2 the dispositive portion of which reads:

WHEREFORE, judgment is hereby rendered in favor of the plaintiff and against the defendants, as follows:

1. Ordering the defendants to pay, jointly and severally, the plaintiff the sum of P130,000.00 plus accrued interest of 5% per month to be reckoned from April 1994 until the same is fully paid;

2. Ordering the defendants to pay, jointly and severally, the sum of P10,000.oo as and for attorneys fees;

3. Ordering the defendants to pay the costs of suit.

SO ORDERED.

On appeal by petitioners, the Regional Trial Court (RTC), Branch 77, Quezon City affirmed the MeTCs Decision in toto.

Petitioners filed a motion for reconsideration but it was denied by the RTC as it does not contain a notice of the time and place of hearing required by Sections 4 and 5, Rule 15 of the 1997 Rules of Civil Procedure, as amended.

Petitioners filed with the Court of Appeals a petition for review, docketed as CA-G.R. SP No. 63265, but it was denied in a Decision dated August 29, 2002. Their motion for reconsideration was likewise denied.

Hence, the instant petition raising the following issues:

1. Whether the Court of Appeals erred in holding that the motion for reconsideration filed with the RTC by petitioners is but a mere scrap of paper for lack of notice of hearing;

2. Whether the Court of Appeals erred when it failed to apply Article 1956 of the Civil Code providing that no interest shall be due unless it has been expressly stipulated in writing;

On the first issue, Sections 4 and 5, Rule 15 of the 1997 Rules of Civil Procedure, as amended, provide:

SEC. 4. Hearing of motion. Except for motions which the court may act upon without prejudicing the rights of the adverse party, every written motion shall be set for hearing by the applicant.

Every written motion required to be heard and the notice of the hearing thereof shall be served in such a manner as to ensure its receipt by the other party at least three (3) days before the date of hearing, unless the court for good cause sets the hearing on shorter notice.

SEC. 5. Notice of hearing. The notice of hearing shall be addressed to all parties concerned, and shall specify the time and date of the hearing which must not be later than ten (10) days after the filing of the motion.

Section 4 lays the general rule that all written motions shall be set for hearing by the movant, except the non-litigated motions or those which may be acted upon by the court without prejudicing the rights of the adverse party. These ex parte motions include a motion for extension of time to file pleadings,3 motion for extension of time to file an answer,4 and a motion for extension of time to file a record on appeal.5 In Manila Surety and Fidelity Co., Inc. v. Bath Construction and Company,6 we ruled that a notice of time and place of hearing is mandatory for motions for new trial or motion for reconsideration, as in this case. We have reiterated this doctrine in Magno v. Ortiz,7 Calero v. Yaptichay,8 Vda. de Azarias v. Maddela,9 Phil. Advertising Counselors, Inc. v. Revilla,10 Sacdalan v. Bautista,11 New Japan Motors, Inc. v. Perucho,12 Firme v. Reyes, et al.,13 and others. More recently, in National Commercial Bank of Saudi Arabia v. Court of Appeals,14 we reaffirmed the rule that the requirement of notice under Sections 4 and 5, Rule 15 is mandatory and the lack thereof is fatal to a motion for reconsideration.1wphi1

We thus hold that the Court of Appeals did not err when it affirmed the RTC ruling that petitioners motion for reconsideration is but a mere scrap of paper because it does not comply with Sections 4 and 5, Rule 15.

Anent the second issue, contrary to petitioners contention, the trial court found that petitioner Teresita Rustia sent respondent a letter begging the latters indulgence regarding her difficulty and that of her husband in paying the 5% monthly interest on their P130,000.00 loan. This finding by the trial court was upheld by the RTC and the Court of Appeals. Indeed, such letter proves that petitioners agreed to pay interest. It is basic that findings of fact by the trial court, when affirmed by the Court of Appeals, are binding and conclusive upon this Court.15 Verily, the Court of Appeals did not err when it sustained the lower courts finding that respondent is entitled to the payment of interests on the subject loan.

WHEREFORE, we DENY the petition. The challenged Decision of the Court of Appeals dated August 29, 2002 in CA-G.R. SP No. 63265 is AFFIRMED IN TOTO. Costs against petitioners.

SO ORDERED.

Republic of the Philippines

SUPREME COURT

Manila

SECOND DIVISION

G.R. No. 93397March 3, 1997

TRADERS ROYAL BANK, petitioner,

vs.

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

TORRES, JR., J.:

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

Docketed as Civil Case No. 83-17966 in the Regional Trial Court of Manila, Branch 32, the action was originally filed as a Petition for Mandamus 5 under Rule 65 of the Rules of Court, to compel the Central Bank of the Philippines to register the transfer of the subject CBCI to petitioner Traders Royal Bank (TRB).

In the said petition, TRB stated that:

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

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

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

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

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

8.Owing to the default of PhilFinance, it executed a Detached Assignment in favor of the Petitioner to enable the latter to have its title completed and registered in the books of the respondent. And by means of said Detachment, Philfinance transferred and assigned all, its rights and title in the said CBCI (Annex "C") to petitioner and, furthermore, it did thereby "irrevocably authorize the said issuer (respondent herein) to transfer the said bond/certificate on the books of its fiscal agent." . . .

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

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

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

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

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

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

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

On December 4, 1984, the Regional Trial Court the case took cognizance of the defendant Central Bank of the Philippines' Motion for Admission of Amended Answer with Counter Claim for Interpleader 6 thereby calling to fore the respondent Filriters Guaranty Assurance Corporation (Filriters), the registered owner of the subject CBCI as respondent.

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

a)The CBCI constitutes part of the reserve investments of Filriters against liabilities requires by the Insurance Code and its assignment or transfer is expressly prohibited by law. There was no attempt to get any clearance or authorization from the Insurance Commissioner;

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

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

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

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

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

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

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

(d)to pay the costs.

SO ORDERED. 9

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

The records reveal that defendant Filriters is the registered owner of CBCI No. D891. Under a deed of assignment dated November 27, 1971, Filriters transferred CBCI No. D891 to Philippine Underwriters Finance Corporation (Philfinance). Subsequently, Philfinance transferred CBCI No. D891, which was still registered in the name of Filriters, to appellant Traders Royal Bank (TRB). The transfer was made under a repurchase agreement dated February 4, 1981, granting Philfinance the right to repurchase the instrument on or before April 27, 1981. When Philfinance failed to buy back the note on maturity date, it executed a deed of assignment, dated April 27, 1981, conveying to appellant TRB all its right and the title to CBCI No. D891.

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

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

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

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

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

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

Said the Court:

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

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

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

SO ORDERED. 13

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

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

The pertinent portions of the subject CBCI read:

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

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

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

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

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

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

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

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

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

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

Clearly shown in the record is the fact that Philfinance's title over CBCI No. D891 is defective since it acquired the instrument from Filriters fictitiously. Although the deed of assignment stated that the transfer was for "value received", there was really no consideration involved. What ha