Sundiang - Complete Cases

Copyright 1994-2009 CD Technologies Asia, Inc. Philippine Jurisprudence 1995-2008 1

THIRD DIVISION

[G.R. No. 125851. July 11, 2006.]

ALLIED BANKING CORPORATION, petitioner, vs. COURT OFAPPEALS, G.G. SPORTSWEAR MANUFACTURINGCORPORATION, NARI GIDWANI, SPOUSES LETICIA ANDLEON DE VILLA AND ALCRON INTERNATIONAL LTD.,respondents.

D E C I S I O N

QUISUMBING, J p:

This petition for review on certiorari assails (a) the July 31, 1996 Decision1(1) of the Court of Appeals, ordering respondent G.G. Sportswear ManufacturingCorp. to reimburse petitioner US $20,085; and exonerating the guarantors fromliability; and (b) the January 17, 1997 Resolution 2(2) denying the motion forreconsideration.

The facts are undisputed.

On January 6, 1981, petitioner Allied Bank, Manila (ALLIED) purchasedExport Bill No. BDO-81-002 in the amount of US $20,085.00 from respondent G.G.Sportswear Mfg. Corporation (GGS). The bill, drawn under a letter of credit No.BB640549 covered Men's Valvoline Training Suit that was in transit to WestGermany (Uniger via Rotterdam) under Cont. #73/S0299. The export bill was issuedby Chekiang First Bank Ltd., Hongkong. With the purchase of the bill, ALLIEDcredited GGS the peso equivalent of the aforementioned bill amounting toP151,474.52 and the receipt of which was acknowledged by the latter in its letterdated June 22, 1981.

On the same date, respondents Nari Gidwani and Alcron International Ltd.

PJG


(Alcron) executed their respective Letters of Guaranty, holding themselves liable onthe export bill if it should be dishonored or retired by the drawee for any reason.

Subsequently, the spouses Leon and Leticia de Villa and Nari Gidwani alsoexecuted a Continuing Guaranty/Comprehensive Surety (surety, for brevity),guaranteeing payment of any and all such credit accommodations which ALLIEDmay extend to GGS. When ALLIED negotiated the export bill to Chekiang, paymentwas refused due to some material discrepancies in the documents submitted by GGSrelative to the exportation covered by the letter of credit. Consequently, ALLIEDdemanded payment from all the respondents based on the Letters of Guaranty andSurety executed in favor of ALLIED. However, respondents refused to pay,prompting ALLIED to file an action for a sum of money.

In their joint answer, respondents GGS and Nari Gidwani admitted the dueexecution of the export bill and the Letters of Guaranty in favor of ALLIED, butclaimed that they signed blank forms of the Letters of Guaranty and the Surety, andthe blanks were only filled up by ALLIED after they had affixed their signatures.They also added that the documents did not cover the transaction involving thesubject export bill. ACTISD

On the other hand, the respondents, spouses de Villa, claimed that they werenot aware of the existence of the export bill; they signed blank forms of the surety;and averred that the guaranty was not meant to secure the export bill.

Respondent Alcron, for its part, alleged that as a foreign corporation doingbusiness in the Philippines, its branch in the Philippines is merely a liaison officeconfined to the following duties and responsibilities, to wit: acting as a messagecenter between its office in Hongkong and its clients in the Philippines; conductingcredit investigations on Filipino clients; and providing its office in Hongkong withshipping arrangements and other details in connection with its office in Hongkong.Respondent Alcron further alleged that neither its liaison office in the Philippines norits then representative, Hans-Joachim Schloer, had the authority to issue Letters ofGuaranty for and in behalf of local entities and persons. It also invoked laches againstpetitioner ALLIED.

GGS and Nari Gidwani filed a Motion for Summary Judgment on the groundthat since the plaintiff admitted not having protested the dishonor of the export bill, itthereby discharged GGS from liability. But the trial court denied the motion. After thepresentation of evidence by the petitioner, only the spouses de Villa presented theirevidence. The other respondents did not. The trial court dismissed the complaint.

PJG


On appeal, the Court of Appeals modified the ruling of the trial court holdingrespondent GGS liable to reimburse petitioner ALLIED the peso equivalent of theexport bill, but it exonerated the guarantors from their liabilities under the Letters ofGuaranty. The CA decision reads as follows:

For the foregoing considerations, appellee GGS is obliged to reimburseappellant Allied Bank the amount of P151,474.52 which was the equivalent ofGGS's contracted obligation of US$20,085.00.

The lower court however correctly exonerated the guarantors from theirliability under their Letters of Guaranty. A guaranty is an accessory contract.What the guarantors guaranteed in the instant case was the bill which had beendischarged. Consequently, the guarantors should be correspondingly released.

WHEREFORE, judgment is hereby rendered orderingdefendant-appellee G.G. Sportswear Mfg. Corporation to pay appellant the sumof P151,474.52 with interest thereon at the legal rate from the filing of thecomplaint, and the costs.

SO ORDERED. 3(3)

The petitioner filed a Motion for Reconsideration, but to no avail. Hence, thisappeal, raising a single issue:

WHETHER OR NOT RESPONDENTS NARI, DE VILLA AND ALCRONARE LIABLE UNDER THE LETTERS OF GUARANTY AND THECONTINUING GUARANTY/ COMPREHENSIVE SURETYNOTWITHSTANDING THE FACT THAT NO PROTEST WAS MADEAFTER THE BILL, A FOREIGN BILL OF EXCHANGE, WASDISHONORED. 4(4)

The main issue raised before us is: Can respondents, in their capacity asguarantors and surety, be held jointly and severally liable under the Letters ofGuaranty and Continuing Guaranty/Comprehensive Surety, in the absence of proteston the bill in accordance with Section 152 of the Negotiable Instruments Law? 5(5)

The petitioner contends that part of the Court of Appeals' decision exoneratingrespondents Nari Gidwani, Alcron International Ltd., and spouses Leon and Leticiade Villa as guarantors and/or sureties. Respondents rely on Section 152 of theNegotiable Instruments Law to support their contention. SECHIA

Our review of the records shows that what transpired in this case is a

PJG


discounting arrangement of the subject export bill, between petitioner ALLIED andrespondent GGS. Previously, we ruled that in a letter of credit transaction, once thecredit is established, the seller ships the goods to the buyer and in the process securesthe required shipping documents of title. To get paid, the seller executes a draft andpresents it together with the required documents to the issuing bank. The issuing bankredeems the draft and pays cash to the seller if it finds that the documents submittedby the seller conform with what the letter of credit requires. The bank then obtainspossession of the documents upon paying the seller. The transaction is completedwhen the buyer reimburses the issuing bank and acquires the documents entitling himto the goods. 6(6) However, in most cases, instead of going to the issuing bank toclaim payment, the buyer (or the beneficiary of the draft) may approach another bank,termed the negotiating bank, to have the draft discounted. 7(7) While the negotiatingbank owes no contractual duty toward the beneficiary of the draft to discount orpurchase it, it may still do so. Nothing can prevent the negotiating bank fromrequiring additional requirements, like contracts of guaranty and surety, inconsideration of the discounting arrangement.

In this case, respondent GGS, as the beneficiary of the export bill, instead ofgoing to Chekiang First Bank Ltd. (issuing bank), went to petitioner ALLIED, to havethe export bill purchased or discounted. Before ALLIED agreed to purchase thesubject export bill, it required respondents Nari Gidwani and Alcron to executeLetters of Guaranty, holding them liable on demand, in case the subject export billwas dishonored or retired for any reason. 8(8)

Likewise, respondents Nari Gidwani and spouses Leon and Leticia de Villaexecuted Continuing Guaranty/Comprehensive Surety, holding themselves jointly andseverally liable on any and all credit accommodations, instruments, loans, advances,credits and/or other obligation that may be granted by the petitioner ALLIED torespondent GGS. 9(9) The surety also contained a clause whereby said sureties waiveprotest and notice of dishonor of any and all such instruments, loans, advances,credits and/or obligations. 10(10) These letters of guaranty and surety are now thebasis of the petitioner's action.

At this juncture, we must stress that obligations arising from contracts have theforce of law between the parties and should be complied with in good faith. 11(11)Nothing can stop the parties from establishing stipulations, clauses, terms andconditions as they may deem convenient, provided they are not contrary to law,morals, good customs, public order, or public policy. 12(12)

PJG


Here, Art. 2047 of the New Civil Code is pertinent. Art. 2047 states,

Art. 2047. By guaranty a person, called the guarantor, binds himself tothe creditor to fulfill the obligation of the principal debtor in case the lattershould fail to do so.

If a person binds himself solidarily with the principal debtor, theprovisions of Section 4, Chapter 3, Title I of this Book shall be observed. Insuch case the contract is called a suretyship.

In this case, the Letters of Guaranty and Surety clearly show that respondentsundertook and bound themselves as guarantors and surety to pay the full amount ofthe export bill.

Respondents claim that the petitioner did not protest 13(13) upon dishonor ofthe export bill by Chekiang First Bank, Ltd. According to respondents, since therewas no protest made upon dishonor of the export bill, all of them, as indorsers weredischarged under Section 152 of the Negotiable Instruments Law.

Section 152 of the Negotiable Instruments Law pertaining to indorsers, reliedon by respondents, is not pertinent to this case. There are well-defined distinctionsbetween the contract of an indorser and that of a guarantor/surety of a commercialpaper, which is what is involved in this case. The contract of indorsement is primarilythat of transfer, while the contract of guaranty is that of personal security. 14(14) Theliability of a guarantor/surety is broader than that of an indorser. Unless the bill ispromptly presented for payment at maturity and due notice of dishonor given to theindorser within a reasonable time, he will be discharged from liability thereon. 15(15)On the other hand, except where required by the provisions of the contract ofsuretyship, a demand or notice of default is not required to fix the surety's liability.16(16) He cannot complain that the creditor has not notified him in the absence of aspecial agreement to that effect in the contract of suretyship. 17(17) Therefore, noprotest on the export bill is necessary to charge all the respondents jointly andseverally liable with G.G. Sportswear since the respondents held themselves liableupon demand in case the instrument was dishonored and on the surety, they evenwaived notice of dishonor as stipulated in their Letters of Guarantee. CcAIDa

As to respondent Alcron, it is bound by the Letter of Guaranty executed by itsrepresentative Hans-Joachim Schloer. As to the other respondents, not to beoverlooked is the fact that, the "Suretyship Agreement" they executed, expresslycontemplated a solidary obligation, providing as it did that ". . . the sureties hereby

PJG


guarantee jointly and severally the punctual payment of any and all such creditaccommodations, instruments, loans, . . . which is/are now or may hereafter becomedue or owing . . . by the borrower". 18(18) It is a cardinal rule that if the terms of acontract are clear and leave no doubt as to the intention of the contracting parties, theliteral meaning of its stipulation shall control. 19(19) In the present case, there can beno mistaking about respondents' intent, as sureties, to be jointly and severallyobligated with respondent G.G. Sportswear.

Respondents also aver that, (1) they only signed said documents in blank; (2)they were never made aware that said documents will cover the payment of the exportbill; and (3) laches have set in.

Respondents' stance lacks merit. Under Section 3 (d), Rule 131 of the Rules ofCourt, it is presumed that a person takes ordinary care of his concerns. Hence, thenatural presumption is that one does not sign a document without first informinghimself of its contents and consequences. Said presumption acquires greater force inthe case at bar where not only one document but several documents were executed atdifferent times and at different places by the herein respondent guarantors andsureties. 20(20)

In this case, having affixed their consenting signatures in several documentsexecuted at different times, it is safe to presume that they had full knowledge of itsterms and conditions, hence, they are precluded from asserting ignorance of the legaleffects of the undertaking they assumed thereunder. It is also presumed that privatetransactions have been fair and regular 21(21) and that he who alleges has the burdenof proving his allegation with the requisite quantum of evidence. 22(22) But here therecords of this case do not support their claims.

Last, we find the defense of laches unavailing. The question of laches isaddressed to the sound discretion of the court and since laches is an equitabledoctrine, its application is controlled by equitable considerations. 23(23)Respondents, however, failed to show that the collection suit against them as suretieswas inequitable. Remedies in equity address only situations tainted with inequity, notthose expressly governed by statutes. 24(24)

After considering the facts of this case vis--vis the pertinent laws, we areconstrained to rule for the petitioner.

WHEREFORE, the instant petition is GRANTED. The assailed Decision ofthe Court of Appeals is hereby MODIFIED, and we hold that respondent Alcron

PJG


International Ltd. is subsidiarily liable, while respondents Nari Gidwani, and SpousesLeon and Leticia de Villa are jointly and severally liable together with G.G.Sportswear, to pay petitioner Bank the sum of P151,474.52 with interest at the legalrate from the filing of the complaint, and the costs. aAHTDS

SO ORDERED.

Carpio, Carpio-Morales, Tinga and Velasco, Jr., JJ., concur.

Footnotes

1. Rollo, pp. 31-37. Penned by Associate Justice Alfredo L. Benipayo, with AssociateJustices Buenaventura J. Guerrero, and Romeo A. Brawner concurring.

2. Id. at 38. Penned by Associate Justice Romeo A. Brawner, with Associate JusticesMinerva P. Gonzaga Reyes, and Buenaventura J. Guerrero concurring.

3. Rollo, p. 36. 4. Id. at 23. 5. Sec. 152 In what cases protest necessary Where a foreign bill appearing on its

face to be such is dishonored by non-acceptance, it must be duly protested fornon-acceptance, and where such a bill which has not been previously beendishonored by non-acceptance is dishonored by non-payment, it must be dulyprotested for non-payment. If it is not so protested, the drawer and indorsers aredischarged. Where a bill does not appear on its face to be a foreign bill, protestthereof in case of dishonor is unnecessary.

6. Bank of America, NT & SA v. Court of Appeals, G.R. No. 105395, December 10,1993, 228 SCRA 357, 366.

7. Id. at 369. 8. Records, p. 12. The Letters of Guaranty provides that,

xxx xxx xxxIf for any reason, my/our draft is not finally honored or retired by the drawee,

I/We hereby further undertake and bind myself/ourselves to refund to you, ondemand, the full amount of this negotiation, together with the corresponding interestthereon as well as your correspondent's charges and expenses thereon, if any; and tocompensate you fully for any damages that you might incur arising out of any suit,action or proceedings, whether judicial or extra-judicial that might be instituted bythe buyer or importer on the ground of lack of faithful performance of the contractbetween said buyer or importer and myself/ourselves. . . (Emphasis supplied.)

9. Id. at 14. Paragraph I of the surety provides:I. For and in consideration of any accommodation which you have

extended and/or will extend to G.G. SPORTSWEAR MANUFACTURINGCORPORATION (hereinafter called the "Borrower") with or without security,singularly or jointly and severally with others, . . . the undersigned agree(s) toguarantee, and does hereby guarantee jointly and severally the punctual payment at

PJG


maturity to you of any and all such credit accommodations, instruments, loans,advances, credits and/or other obligations, hereinbefore referred to, which is/are nowor may hereafter become due or owing to you by the Borrower . . .

10. Id. at 15. Paragraph VIII of the surety provides:VIII. The undersigned hereby waives . . . protest and notice of dishonor of any

and all such instruments, loans, advances, credits or other indebtedness or obligationherein-before referred to, . . .

11. NEW CIVIL CODE, Art. 1159.12. Id. at Art. 1306. The contracting parties may establish such stipulations, clauses,

terms and conditions as they may deem convenient, provided they are not contrary tolaw, morals, good customs, public order, or public policy.

13. Rollo, p. 158.14. Acme Shoe, Rubber & Plastic Corp. v. Court of Appeals, G.R. No. 103576, August

22, 1996, 260 SCRA 714, 719.15. Supra note 5.16. Umali v. Court of Appeals, G.R. No. 89561, September 13, 1990, 189 SCRA 529,

545.17. Palmares v. Court of Appeals, G.R. No. 126490, March 31, 1998, 288 SCRA 422,

439.18. Records, p. 14.19. NEW CIVIL CODE, Art. 1370.20. Lee v. Court of Appeals, G.R. No. 117913, February 1, 2002, 375 SCRA 579, 601.21. REVISED RULES OF COURT, Rule 131, Sec. 3 (p).22. Heirs of Basanes v. Cortes, OCA IPI No. 01-1065-P, March 31, 2003 citing People v.

Topaguen, G.R. Nos. 116596-98, March 31, 1997, 269 SCRA 601, 614.23. Agra v. Philippine National Bank, G.R. No. 133317, June 29, 1999, 309 SCRA 509,

520.24. Id.

PJG


SECOND DIVISION

[G.R. No. 148211. July 25, 2006.]

SINCERE Z. VILLANUEVA, petitioner, vs. MARLYN P. NITE, *(1)respondent.

D E C I S I O N

CORONA, J p:

In this petition for review on certiorari under Rule 45, petitioner submits thatthe Court of Appeals (CA) erred in annulling and setting aside the Regional TrialCourt (RTC) decision on the ground of extrinsic fraud.

The facts follow. 1(2)

Respondent allegedly took out a loan of P409,000 from petitioner. To securethe loan, respondent issued petitioner an Asian Bank Corporation (ABC) check(Check No. AYA 020195) in the amount of P325,500 dated February 8, 1994. Thedate was later changed to June 8, 1994 with the consent and concurrence of petitioner.

The check was, however, dishonored due to a material alteration whenpetitioner deposited the check on due date. On August 24, 1994, respondent, throughher representative Emily P. Abojada, remitted P235,000 to petitioner as partialpayment of the loan. The balance of P174,000 was due on or before December 8,1994.

On August 24, 1994, however, petitioner filed an action for a sum of moneyand damages (Civil Case No. Q-94-21495) against ABC for the full amount of thedishonored check. And in a decision dated May 23, 1997, the RTC of Quezon City,Branch 101 ruled in his favor. 2(3) When respondent went to ABC Salcedo VillageBranch on June 30, 1997 to withdraw money from her account, she was unable to do

PJG


so because the trial court had ordered ABC to pay petitioner the value of respondent'sABC check. DAETHc

On August 25, 1997, ABC remitted to the sheriff a manager's check amountingto P325,500 drawn on respondent's account. The check was duly received bypetitioner on the same date.

Respondent then filed a petition in the CA seeking to annul and set aside thetrial court's decision ordering ABC to pay petitioner the value of the ABC check. 3(4)The CA ruled:

WHEREFORE, premises considered, the petition is GRANTED andthe Decision dated May 23, 1997 of the public respondent is herebyANNULLED and SET ASIDE for extrinsic fraud.

[Petitioner] Villanueva is hereby ordered to pay [Nite]

1) the sum of [P146,500] as actual damages plus interest at 12% perannum from August 25, 1997 until full payment;

2) the sum of [P75,000] as moral damages;

3) the sum of [P50,000] as exemplary damages; and

4) the sum of [P50,000] as attorney's fees and cost of suit.

SO ORDERED. 4(5)

Thus, this petition. We find for respondent.

Annulment of judgment is a remedy in law independent of the case where thejudgment sought to be annulled is promulgated. It can be filed by one who was not aparty to the case in which the assailed judgment was rendered. Section 1 of Rule 47provides:

Section 1. Coverage. This Rule shall govern the annulment by the Court ofAppeals of judgments or final orders and resolutions in civil actions of RegionalTrial Courts for which the ordinary remedies of new trial, appeal, petition forrelief or other appropriate remedies are no longer available through no fault ofthe petitioner.

Respondent may avail of the remedy of annulment of judgment under Rule 47.The ordinary remedies of new trial, appeal and petition for relief were not available

PJG


to her for the simple reason that she was not made a party to the suit against ABC.Thus, she was neither able to participate in the original proceedings nor resort to theother remedies because the case was filed when she was abroad. caADSE

Annulment of judgment may be based only on extrinsic fraud and lack ofjurisdiction. 5(6) Extrinsic or collateral fraud pertains to such fraud which preventsthe aggrieved party from having a trial or presenting his case to the court, or is used toprocure the judgment without fair submission of the controversy. 6(7) This refers toacts intended to keep the unsuccessful party away from the courts as when there is afalse promise of compromise or when one is kept in ignorance of the suit. 7(8)

We uphold the appellate court's finding of extrinsic fraud:

Barely 6 days after receipt of the partial payment of P235,000.00 andagreeing that the balance of P174,000.00 shall be paid on or before December 8,1994, [Sincere] filed his complaint against [ABC] for the full amount of thedishonored check in the sum of P320,500.00 without impleading petitioner. Theapparent haste by which [Sincere] filed his complaint and his failure to implead[Marlyn] clearly shows his intent to prevent [Marlyn] from opposing his action.

[A]t the time news about [Marlyn] having left the country waswidespread, appearing even in print media as early as May 1994, [Marlyn] paid[Sincere] the amount of P235,000.00 as partial payment on [August 18, 1994],through a representative.

Notwithstanding the foregoing, SIX (6) days later or on [August 24,1994, Sincere] instituted an action for collection with damages for the wholeamount of the issued check.

[Sincere] does not deny knowledge of such payment neither of the factthat he concurred in settling the balance of P174,000.00 on December 8, 1994.

[His] actuation and pronouncement shows not only bad faith on his partbut also of his fraudulent intention to completely exclude [Marlyn] from theproceedings in the court a quo. By doing what he did he prevented the [trialcourt] from fully appreciating the particulars of the case. 8(9)

In any event, the RTC decision may be annulled for lack of jurisdiction overthe person of respondent. The pertinent provisions of the Negotiable Instruments Laware enlightening: TEDaAc

SEC. 185. Check, defined. A check is a bill of exchange drawn on a bankpayable on demand. Except as herein otherwise provided, the provisions of this

PJG


Act applicable to a bill of exchange payable on demand apply to a check. 9(10)(emphasis ours)

SEC. 189. When check operates as an assignment. A check of itself doesnot operate as an assignment of any part of the funds to the credit of the drawerwith the bank, and the bank is not liable to the holder, unless and until itaccepts or certifies the check. (emphasis ours)

If a bank refuses to pay a check (notwithstanding the sufficiency of funds), thepayee-holder cannot, in view of the cited sections, sue the bank. The payee shouldinstead sue the drawer who might in turn sue the bank. Section 189 is sound lawbased on logic and established legal principles: no privity of contract exists betweenthe drawee-bank and the payee. Indeed, in this case, there was no such privity ofcontract between ABC and petitioner.

Petitioner should not have sued ABC. Contracts take effect only between theparties, their assigns and heirs, except in cases where the rights and obligationsarising from the contract are not transmissible by their nature, or by stipulation or byprovision of law. 10(11) None of the foregoing exceptions to the relativity ofcontracts applies in this case.

The contract of loan was between petitioner and respondent. No collection suitcould prosper without respondent who was an indispensable party. Rule 3, Sec. 7 ofthe Rules of Court states:

Sec. 7. Compulsory joinder of indispensable parties. Parties in interestwithout whom no final determination can be had of an action shall be joinedeither as plaintiffs or defendants. (emphasis ours)

An indispensable party is one whose interest in the controversy is such that afinal decree will necessarily affect his rights. The court cannot proceed without hispresence. 11(12) If an indispensable party is not impleaded, any judgment isineffective. 12(13) On this, Aracelona v. Court of Appeals 13(14) declared:

Rule 3, Section 7 of the Rules of Court defines indispensable parties asparties-in-interest without whom there can be no final determination of anaction. As such, they must be joined either as plaintiffs or as defendants. Thegeneral rule with reference to the making of parties in a civil action requires, ofcourse, the joinder of all necessary parties where possible, and the joinder of allindispensable parties under any and all conditions, their presence being sine quanon for the exercise of judicial power. It is precisely "when an indispensableparty is not before the court (that) the action should be dismissed." The absence

PJG


of an indispensable party renders all subsequent actions of the court null andvoid for want of authority to act, not only as to the absent parties but even as tothose present. aSDCIE

WHEREFORE, the petition is hereby DENIED. The decision of the Court ofAppeals in CA-G.R. SP No. 44971 is AFFIRMED in toto.

Costs against petitioner.

SO ORDERED.

Puno, Sandoval-Gutierrez, Azcuna and Garcia, JJ., concur.

Footnotes

*. Some parts of the records refer to respondent as "Marilyn Nite." 1. CA Decision in CA-G.R. SP No. 44971, rollo, pp. 29-30. 2. Penned by Judge Pedro T. Santiago. 3. CA-G.R. SP No. 44971: Marlyn P. Nite v. Hon. Pedro T. Santiago, as Judge of the

RTC, Br. 101, Quezon City, Sincere Z. Villanueva and Asian Bank Corporation. 4. Decision penned by Associate Justice Eliezer R. De Los Santos and concurred in by

Associate Justices Godardo A. Jacinto and Bernardo P. Abesamis of the NinthDivision of the Court of Appeals; rollo, p. 35.

5. RULES OF COURT, Rule 47, Sec. 2. 6. Regalado, REMEDIAL LAW COMPENDIUM (1999), National Bookstore, Inc.,

Manila, pp. 380 and 557. 7. Id., pp. 380-381. 8. Rollo, pp. 32-33. 9. See Negotiable Instruments Law, Sections 126-183.

SEC. 126. Bill of exchange, defined. A bill of exchange is anunconditional order in writing addressed by one person to another, signed by theperson giving it, requiring the person to whom it is addressed to pay on demand or ata fixed or determinable future time a sum certain in money or order or to bearer.

SEC. 127. Bill not an assignment in hands of drawee. A bill of itselfdoes not operate as an assignment of the funds in the hands of the drawee availablefor the payment thereof, and the drawee is not liable on the bill unless and until heaccepts the same. (emphasis ours)

10. CIVIL CODE, Art. 1311.11. Regalado, supra note 6, at 83.12. Id.13. 345 Phil. 250, 267 (1997).

PJG


FIRST DIVISION

[G.R. No. 137002. July 27, 2006.]

BANK OF THE PHILIPPINE ISLANDS, petitioner, vs.COMMISSIONER OF INTERNAL REVENUE, respondent.

D E C I S I O N

CHICO-NAZARIO, J p:

This is a Petition for Review on Certiorari under Rule 45 of the 1997 Rules ofCourt, as amended, seeking to set aside a Decision 1(1) of the Court of Appeals dated14 August 2004 ordering the petitioner to pay respondent Commissioner of InternalRevenue (CIR) deficiency documentary stamp tax of P690,030 for the year 1986,inclusive of surcharge and compromise penalty, plus 20% annual interest until fullypaid. The Court of Appeals in its assailed Decision affirmed the Decision 2(2) of theCourt of Tax Appeals (CTA) dated 31 May 1994.

From 28 February 1986 to 8 October 1986, petitioner Bank of the PhilippineIslands (BPI) sold to the Central Bank of the Philippines (now Bangko Sentral ngPilipinas) U.S. dollars for P1,608,541,900.00. BPI instructed, by cable, itscorrespondent bank in New York to transfer U.S. dollars deposited in BPI's accounttherein to the Federal Reserve Bank in New York for credit to the Central Bank'saccount therein. Thereafter, the Federal Reserve Bank sent to the Central Bankconfirmation that such funds had been credited to its account and the Central Bankpromptly transferred to the petitioner's account in the Philippines the correspondingamount in Philippine pesos. 3(3)

During the period starting 11 June 1985 until 9 March 1987, the Central Bankenjoyed tax exemption privileges pursuant to Resolution No. 35-85 dated 3 May 1985of the Fiscal Incentive Review Board. However, in 1985, Presidential Decree No.1994 An Act Further Amending Certain Provisions of the National Internal

PJG


Revenue Code was enacted. This law amended Section 222 (now 173) of the NationalInternal Revenue Code (NIRC), by adding the foregoing:

[W]henever one party to the taxable document enjoys exemption from the taxherein imposed, the other party thereto who is not exempt shall be the onedirectly liable for the tax.

In 1988, respondent CIR ordered an investigation to be made on BPI's sale offoreign currency. As a result thereof, the CIR issued a pre-assessment noticeinforming BPI that in accordance with Section 195 (now Section 182) 4(4) of theNIRC, BPI was liable for documentary stamp tax at the rate of P0.30 per P200.00 onall foreign exchange sold to the Central Bank. Total tax liability was assessed atP3,016,316.06, which consists of a documentary stamp tax liability of P2,412,812.85,a 25% surcharge of P603,203.21, and a compromise penalty of P300.00. 5(5)

BPI disputed the findings contained in the pre-assessment notice. Nevertheless,the CIR issued Assessment No. FAS-5-86-88-003022, dated 30 September 1988,which BPI received on 11 October 1988. BPI formally protested the assessment, butthe protest was denied. On 10 July 1990, BPI received the final notice and demand forpayment of its 1986 assessment for deficiency documentary stamp tax in the amountof P3,016,316.06. Consequently, a petition for review was filed with the CTA on 9August 1990. 6(6)

On 31 May 1994, the CTA rendered the Decision holding BPI liable fordocumentary stamp tax in connection with the sale of foreign exchange to the CentralBank from the period 29 July 1986 to 8 October 1986 only, thus substantiallyreducing the CIR's original assessment. The dispositive portion of the said Decisionreads:

WHEREFORE, premises considered, petitioner is hereby ordered to payrespondent Commissioner of Internal Revenue, the amount of P690,030inclusive of surcharge and compromise penalty, plus 20% annual interest untilfully paid pursuant to Section 249 (cc) (sic) (3) of the Tax Code. 7(7)

The CTA ruled that BPI's instructions to its correspondent bank in the U.S. topay to the Federal Reserve Bank in New York, for the account of the Central Bank, asum of money falls squarely within the scope of Section 51 of The RevisedDocumentary Stamp Tax Regulations (Regulations No. 26), dated 26 March 1924, theimplementing rules to the earlier provisions on documentary stamp tax, whichprovides that: 8(8)

PJG


What may be regarded as telegraphic transfer. a local bank cables to acertain bank in a foreign country with which bank said local bank has a credit,and directs that foreign bank to pay to another bank or person in the samelocality a certain sum of money, the document for and in respect suchtransaction will be regarded as a telegraphic transfer, taxable under theprovisions of Section 1449(i) of the Administrative Code. ISHaCD

Nevertheless, the CTA also noted that although Presidential Decree No. 1994,the law which passes the liability on to the non-exempt party, was published in theOfficial Gazette issue of 2 December 1985, the same was released to the public onlyon 18 June 1986, as certified by the National Printing Office. Therefore, PresidentialDecree No. 1994 took effect only in July 1986 or 15 days after the issue of OfficialGazette where the law was actually published, that is, circulated to the public. As aresult of the delay, BPI's transactions prior to the effectivity of Presidential DecreeNo. 1994 were not subject to documentary stamp tax. Hence, the CTA reduced theassessment from P3,016,316.06 to P690,030.00, plus 20% annual interest until fullypaid pursuant to Section 249(c) of the NIRC. 9(9)

Both parties filed their respective Motions for Reconsideration, which the CTAdenied in a Resolution dated 26 September 1994. BPI filed a Petition for Review withthe Court of Appeals on 11 November 1994. On 14 August 1998, the Court ofAppeals affirmed the Decision of the CTA. The Court of Appeals ruled that thedocumentary stamp tax imposed under Section 195 (now Section 182) is not limitedonly to foreign bills of exchange and letters of credit but also includes the ordersmade by telegraph or by any other means for the payment of money made by anyperson drawn in but payable out of the Philippines. The Court of Appeals alsomaintained that telegraphic transfers, such as the one BPI sent to its correspondentbank in the U.S., are proper subjects for the imposition of documentary stamp taxunder Section 195 (now Section 182) and Section 51 of Revenue Regulation No. 26.The Court of Appeals likewise affirmed the CTA's Decision imposing a 20%delinquency on the reduced assessment, in accordance with Section 24(c)(3) of theNIRC and the case of Philippine Refining Company v. Court of Appeals. 10(10)

Petitioner filed a Partial Motion for Reconsideration on 9 September 1998,which the Court of Appeals denied on 29 December 1998. 11(11)

Hence this petition, wherein the petitioner raised the following issues:

I

WHETHER OR NOT, THE COURT OF APPEALS GRIEVOUSLY ERRED

PJG


IN HOLDING THAT SALES OF FOREIGN EXCHANGE (SPOT CASH), ASDISTINGUISHED FROM SALES OF FOREIGN BILLS OF EXCHANGE,ARE SUBJECT TO DOCUMENTARY STAMP TAX UNDER SECTION 182OF THE TAX CODE

II

WHETHER OR NOT, THE COURT OF APPEALS GRIEVOUSLY ERREDIN AFFIRMING THE IMPOSITION OF A DELINQUENCY INTEREST OF20% ON THE REVISED DEFICIENCY STAMP ASSESSMENT DESPITE AREDUCTION THEREOF BY THE COURT OF TAX APPEALS WHICHERRED IN ITS ORIGINAL ASSESSMENT. 12(12)

The first issue raised by the petitioner is whether BPI is liable for documentarystamp taxes in connection with its sale of foreign exchange to the Central Bank in1986 under Section 195 (now Section 182) of the NIRC, quoted hereunder:

Sec. 182. Stamp tax on foreign bills of exchange and letters of credit.On all foreign bills of exchange and letters of credit (including orders, bytelegraph or otherwise, for the payment of money issued by express orsteamship companies or by any person or persons) drawn in but payable out ofthe Philippines in a set of three or more according to the custom of merchantsand bankers, there shall be collected a documentary stamp tax of thirty centavoson each two hundred pesos, or fractional part thereof, of the face value of suchbill of exchange or letter of credit, or the Philippine equivalent of such facevalue, if expressed in foreign country.

To determine what is being taxed under this section, a discussion on the natureof the acts covered by Section 195 (now Section 182) of the NIRC is indispensable.This section imposes a documentary stamp tax on (1) foreign bills of exchange, (2)letters of credit, and (3) orders, by telegraph or otherwise, for the payment of moneyissued by express or steamship companies or by any person or persons. Thisenumeration is further limited by the qualification that they should be drawn in thePhilippines and payable outside of the Philippines.

A definition of a "bill of exchange" is provided by Section 39 of RegulationsNo. 26, the rules governing documentary taxes promulgated by the Bureau of InternalRevenue (BIR) in 1924:

Sec. 39. Definition of "bill of exchange". The term bill of exchangedenotes 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

PJG


stated date.

Section 126 of The Negotiable Instruments Law (Act No. 2031) reiterates thatit is an "order for the payment of money" and specifies the particular requisites thatmake it negotiable.

Sec. 126. Bill of exchange defined. A bill of exchange is anunconditional order in writing addressed by one person to another, signed by theperson giving it, requiring the person to whom it is addressed to pay on demandor at fixed or determinable future time a sum certain in money to order or tobearer.

Section 129 of the same law classifies bills of exchange as inland and foreign,the distinction is laid down by where the bills are drawn and paid. Thus, a "foreignbill of exchange" may be drawn outside the Philippines, payable outside thePhilippines, or both drawn and payable outside of the Philippines.

Sec. 129. Inland and foreign bills of exchange. An inland bill ofexchange is a bill which is, or on its face purports to be, both drawn and payablewithin the Philippines. Any other bill is a foreign bill. . . .

The Code of Commerce loosely defines a "letter of credit" and provides for itsessential conditions, thus:

Art. 567. Letters of credit are those issued by one merchant toanother or for the purpose of attending to a commercial transaction.

Art 568. The essential conditions of letters of credit shall be:

1. To be issued in favor of a definite person and not to order.

2. To be limited to a fixed and specified amount, or to one or moreundetermined amounts, but within a maximum the limits ofwhich has to be stated exactly.

A more explicit definition of a letter of credit can be found in thecommentaries:

A letter of credit is one whereby one person requests some other person toadvance money or give credit to a third person, and promises that he will repaythe same to the person making the advancement, or accept the bills drawn uponhimself for the like amount. 13(13)

A bill of exchange and a letter of credit may differ as to their negotiability, and

PJG


as to who owns the funds used for the payment at the time payment is made.However, in both bills of exchange and letters of credit, a person orders another topay money to a third person.

The phrase "orders, by telegraph or otherwise, for the payment of money" usedin reference to documentary stamp taxes may be found in an earlier documentary taxprovision, Section 1449(i) of the Administrative Code of 1917, which wassubstantially reproduced in Section 195 (now Section 182) of the NIRC. RegulationsNo. 26, which provided the rules and guidelines for the documentary stamp taximposed under the Administrative Code of 1917, contains an explanation for thephrase "orders, by telegraph or otherwise, for the payment of money":

What may be regarded as telegraphic transfer. a local bank cables toa certain bank in a foreign country with which bank said local bank has a credit,and directs that foreign bank to pay to another bank or person in the samelocality a certain sum of money, the document for and in respect suchtransaction will be regarded as a telegraphic transfer, taxable under theprovisions of Section 1449(i) of the Administrative Code. TDcEaH

In this case, BPI ordered its correspondent bank in the U.S. to pay the FederalReserve Bank in New York a sum of money, which is to be credited to the account ofthe Central Bank. These are the same acts described under Section 51 of RegulationsNo. 26, interpreting the documentary stamp tax provision in the Administrative Codeof 1917, which is substantially identical to Section 195 (now Section 182) of theNIRC. These acts performed by BPI incidental to its sale of foreign exchange to theCentral Bank are included among those taxed under Section 195 (now Section 182) ofthe NIRC.

BPI alleges that the assailed decision must be reversed since the sale betweenBPI and the Central Bank of foreign exchange, as distinguished from foreign bills ofexchange, is not subject to the documentary stamp taxes prescribed in Section 195(now Section 182) of the NIRC. This argument leaves much to be desired. In thiscase, it is not the sale of foreign exchange per se that is being taxed under Section 195of the NIRC. This section refers to a documentary stamp tax, which is an excise uponthe facilities used in the transaction of the business separate and apart from thebusiness itself. 14(14) It is not a tax upon the business itself which is so transacted, butit is a duty upon the facilities made use of and actually employed in the transaction ofthe business, and separate and apart from the business itself. 15(15)

Section 195 (now Section 182) of the NIRC covers foreign bills of exchange,letters of credit, and orders of payment for money, drawn in Philippines, but payable

PJG


outside the Philippines. From this enumeration, two common elements need to bepresent: (1) drawing the instrument or ordering a drawee, within the Philippines; and(2) ordering that drawee to pay another person a specified amount of money outsidethe Philippines. What is being taxed is the facility that allows a party to draw the draftor make the order to pay within the Philippines and have the payment made in anothercountry.

A perusal of the facts contained in the record in this case shows that BPI, whilein the Philippines, ordered its correspondent bank by cable to make a payment, andthat payment is to be made to the Federal Reserve Bank in New York. Thus, BPImade use of the aforementioned facility. As a result, BPI need not have sent arepresentative to New York, nor did the Federal Reserve Bank have to go to thePhilippines to collect the funds which were to be credited to the Central Bank'saccount with them. The transaction was made at the shortest time possible and at thegreatest convenience to the parties. The tax was laid upon this privilege or facilityused by the parties in their transactions, transactions which they may effect throughour courts, and which are regulated and protected by our government.

BPI further alleges that since the funds transferred to the Federal Reserve Bankwere taken from BPI's account with the correspondent bank, this is not the transactioncontemplated under Section 51 of Regulations No. 26. BPI argues that Section 51 ofRegulations No. 26, in using the phrase "with which local bank has credit," involvestransactions wherein the drawee bank pays with its own funds and excludes from thecoverage of the law situations wherein the funds paid out by the correspondent bankare owned by the drawer. In the case of Republic of the Philippines v. PhilippineNational Bank, 16(16) the Court equated "credit" with the term "deposits," andidentified the depositor as the creditor and the bank as the debtor.

And as correctly stated by the trial court, the term "credit" in its usual meaningis a sum credited on the books of a company to a person who appears to beentitled to it. It presupposes a creditor-debtor relationship, and may be said toimply ability, by reason of property or estates, to make a promised payment. Itis the correlative to debt or indebtedness, and that which is due to any person, asdistinguished from that which he owes. The same is true with the term"deposits" in banks where the relationship created between the depositor and thebank is that of creditor and debtor.

By this definition of "credit," BPI's deposit account with its correspondentbank is much the same as the "credit" referred to in Section 51 of Regulations No. 26.Thus, the fact that the funds transferred to the Central Bank's account with the FederalReserve Bank are from BPI's deposit account with the correspondent bank can only

PJG


underline that the present case is the same situation described under Section 51 ofRegulations No. 26.

Moreover, the fact that the funds belong to BPI and were not advanced by thecorrespondent bank will not remove the transaction from the coverage of Section 195(now Section 182) of the NIRC. There are transactions covered by this sectionwherein funds belonging to the drawer are used for payment. A bill of exchange,when drawn in the Philippines but payable in another country, would surely becovered by this section. And in the case of a bill of exchange, the funds may belong tothe drawer and need not be advanced by the drawee, as in the case of a check or adraft. In the description of a draft provided hereunder, the drawee is in possession offunds belonging to the drawer of the bill:

A draft is a form of a bill of exchange used mainly in transactions betweenpersons physically remote from each other. It is an order made by one person,say the buyer of goods, addressed to a person having in his possession funds ofsuch buyer ordering the addressee to pay the purchase price to the seller of thegoods. Where the order is made by one bank to another, it is referred to as abank draft. 17(17)

BPI argues that the foreign exchange sold was deposited and transferred withinthe U.S. and is therefore outside Philippine territory. This argument is unsubstantial.The documentary stamp tax is not imposed on the sale of foreign exchange, rather it isan excise tax on the privilege or facility which the parties used in their transaction. Inthe case of Allied Thread Co., Inc. v. City Mayor of Manila, 18(18) the Courtexplained the scope encompassed by the power to levy an excise tax:

The tax imposition here is upon the performance of an act, enjoyment ofa privilege, or the engaging in an occupation, and hence is in the nature of anexcise tax.

The power to levy an excise upon the performance of an act or theengaging in an occupation does not depend upon the domicile of the personsubject to the excise, nor upon the physical location of the property and inconnection with the act or occupation taxed, but depends upon the place inwhich the act is performed or occupation engaged in. (Emphasis supplied)

In this case, the act of BPI instructing the correspondent bank to transfer thefunds to the Federal Reserve Bank was performed in the Philippines. Therefore, theexcise tax may be levied by the Philippine government. Section 195 (now Section182) of the NIRC would be rendered invalid if the fact that the payment was made

PJG


outside of the country can be used as a basis for nonpayment of the tax.

The second issue is whether the delinquency interest of 20% per annum, asprovided under Section 249(c)(3) of the NIRC, is applicable in this case.

In the case of Philippine Refining Company v. Court of Appeals, 19(19) thisCourt categorically ruled that even if an assessment was later reduced by the courts, adelinquency interest should still be imposed from the time demand was made by theCIR.

As correctly pointed out by the Solicitor General, the deficiency taxassessment in this case, which was the subject of the demand letter ofrespondent Commissioner dated April 11, 1989, should have been paid withinthirty (30) days from receipt thereof. By reason of petitioner's default thereon,the delinquency penalties of 25% surcharge and interest of 20% accrued fromApril 11, 1989. The fact that petitioner appealed the assessment to the CTA andthat the same was modified does not relieve petitioner of the penalties incidentto delinquency. The reduced amount of P237,381.25 is but a part of the originalassessment of P1,892,584.00. EAIaHD

This doctrine is consistent with the earlier decisions of this Court justifying theimposition of additional charges and interests incident to delinquency by explainingthat the nature of additional charges is compensatory and not a penalty.

The above legal provision makes no distinctions nor does it establishexceptions. It directs the collection of the surcharge and interest at the statedrate upon any sum or sums due and unpaid after the dates prescribed insubsections (b), (c), and (d) of the Act for the payment of the amounts due. Theprovision therefore is mandatory in case of delinquency. This is justifiedbecause the intention of the law is precisely to discourage delay in the paymentof taxes due to the State and, in this sense, the surcharge and interest chargedare not penal but compensatory in nature they are compensation to the Statefor the delay in payment, or for the concomitant use of the funds by the taxpayerbeyond the date he is supposed to have paid them to the State. 20(20)

The same principle was used in Ross v. U.S. 21(21) when the U.S. SupremeCourt ruled that it was only equitable for the government to collect interest from ataxpayer who, by the government's error, received a refund which was not due him.

Even though [the] taxpayer here did not request the refund made to him, and thesituation is entirely due to an error on the part of the government, taxpayer andnot the government has had the use of the money during the period involved andit is not unjustly penalizing taxpayer to require him to pay compensation for this

PJG


use of money.

Based on established doctrine, these charges incident to delinquency arecompensatory in nature and are imposed for the taxpayers' use of the funds at the timewhen the State should have control of said funds. Collecting such charges ismandatory. Therefore, the Decision of the Court of Appeals imposing a 20%delinquency interest over the assessment reduced by the CTA was justified and inaccordance with Section 249(c)(3) of the NIRC.

WHEREFORE, premises considered, this Court DENIES this petition andAFFIRMS the Decision of the Court of Appeals in CA-G.R. SP No. 57362 dated 14August 1998, ordering that petitioner Bank of the Philippine Islands to payRespondent Commissioner of Internal Revenue the deficiency documentary stamp taxin the amount of P690,030.00 inclusive of surcharge and compromise penalty, plus20% annual interest from 7 June 1990 until fully paid. Costs against the petitioner.

SO ORDERED.

Panganiban, C.J., Ynares-Santiago, Austria-Martinez and Callejo, Sr., JJ.,concur.

Footnotes

1. Penned by Associate Justice Arturo B. Buena with Associate Justice Ramon Mabutas,Jr. and Associate Justice Hilarion L. Aquino, concurring; Rollo, pp. 42-51.

2. CA rollo, pp. 52-64. 3. Rollo, p. 42 4. Sec. 182. Stamp tax on foreign bills of exchange and letters of credit. On all foreign

bills of exchange and letters of credit (including orders, by telegraph or otherwise, forthe payment of money issued by express or steamship companies or by any person orpersons) drawn in but payable out of the Philippines in a set of three or moreaccording to the custom of merchants and bankers, there shall be collected adocumentary stamp tax of thirty centavos on each two hundred pesos, or fractionalpart thereof, of the face value of such bill of exchange or letter of credit, or thePhilippine equivalent of such face value, if expressed in foreign country.

5. CA rollo, p. 53. 6. Id. 7. Id. at 63-64. 8. Id. at 54-55. 9. Id. at 60-63.10. 326 Phil. 680 (1996).11. Rollo, p. 54.12. Id. at 5.

PJG


13. Jose Campos, Jr. and Maria Clara Lopez-Campos, Notes and Selected Cases onNegotiable Instruments Law, Fifth Edition. Quezon City: Central Professional Books,Inc, 1994, p. 878.

14. DuPont v. U.S., 300 U.S. 150 (1937)15. Lincoln Philippine Life Insurance Company, Inc. v. Court of Appeals, 354 Phil. 896,

904 (1998); Nicol v. Ames, 173 US 509 (1899).16. 113 Phil. 828, 830-831 (1961).17. Supra note 13 at 3.18. 218 Phil. 308, 313-314 (1984).19. Supra note 10 at 691.20. Republic v. Philippine Bank of Commerce, 145 Phil. 81, 89 (1970).21. 148 F. Supp. 330 (1957), p. 333.

PJG


THIRD DIVISION

[G.R. No. 156132. February 6, 2007.]

CITIBANK, N.A. (Formerly First National City Bank) andINVESTORS' FINANCE CORPORATION, doing business underthe name and style of FNCB Finance, petitioners, vs. MODESTA R.SABENIANO, respondent.

R E S O L U T I O N

CHICO-NAZARIO, J p:

On 16 October 2006, this Court promulgated its Decision 1(1) in theabove-entitled case, the dispositive portion of which reads

IN VIEW OF THE FOREGOING, the instant Petition is PARTLYGRANTED. The assailed Decision of the Court of Appeals in CA-G.R. No.51930, dated 26 March 2002, as already modified by its Resolution, dated 20November 2002, is hereby AFFIRMED WITH MODIFICATION, as follows

1. PNs No. 23356 and 23357 are DECLARED subsisting andoutstanding. Petitioner Citibank is ORDERED to return to respondent theprincipal amounts of the said PNs, amounting to Three Hundred EighteenThousand Eight Hundred Ninety-Seven Pesos and Thirty-Four Centavos(P318,897.34) and Two Hundred Three Thousand One Hundred Fifty Pesos(P203,150.00), respectively, plus the stipulated interest of Fourteen and a halfpercent (14.5%) per annum, beginning 17 March 1977;

2. The remittance of One Hundred Forty-Nine Thousand SixHundred Thirty Two US Dollars and Ninety-Nine Cents (US$149,632.99) fromrespondent's Citibank-Geneva accounts to petitioner Citibank in Manila, and theapplication of the same against respondent's outstanding loans with the latter, is

PJG


DECLARED illegal, null and void. Petitioner Citibank is ORDERED torefund to respondent the said amount, or its equivalent in Philippine currencyusing the exchange rate at the time of payment, plus the stipulated interest foreach of the fiduciary placements and current accounts involved, beginning 26October 1979;

3. Petitioner Citibank is ORDERED to pay respondent moraldamages in the amount of Three Hundred Thousand Pesos (P300,000.00);exemplary damages in the amount of Two Hundred Fifty Thousand Pesos(P250,000.00); and attorney's fees in the amount of Two Hundred ThousandPesos (P200,000.00); and

4. Respondent is ORDERED to pay petitioner Citibank the balanceof her outstanding loans, which, from the respective dates of their maturity to 5September 1979, was computed to be in the sum of One Million Sixty-NineThousand Eight Hundred Forty-Seven Pesos and Forty Centavos(P1,069,847.40), inclusive of interest. These outstanding loans shall continue toearn interest, at the rates stipulated in the corresponding PNs, from 5 September1979 until payment thereof.

Subsequent thereto, respondent Modesta R. Sabeniano filed an Urgent Motionto Clarify and/or Confirm Decision with Notice of Judgment on 20 October 2006;while, petitioners Citibank, N.A. and FNCB Finance 2(2) filed their Motion forPartial Reconsideration of the foregoing Decision on 6 November 2006.

The facts of the case, as determined by this Court in its Decision, may besummarized as follows.

Respondent was a client of petitioners. She had several deposits and marketplacements with petitioners, among which were her savings account with the localbranch of petitioner Citibank (Citibank-Manila); 3(3) money market placements withpetitioner FNCB Finance; and dollar accounts with the Geneva branch of petitionerCitibank (Citibank-Geneva). At the same time, respondent had outstanding loans withpetitioner Citibank, incurred at Citibank-Manila, the principal amounts aggregating toP1,920,000.00, all of which had become due and demandable by May 1979. Despiterepeated demands by petitioner Citibank, respondent failed to pay her outstandingloans. Thus, petitioner Citibank used respondent's deposits and money marketplacements to off-set and liquidate her outstanding obligations, as follows

Respondent's outstanding obligation (principal and interest as of26 October 1979) P2,156,940.58

Less: Proceeds from respondent's money market placements

PJG


with petitioner FNCB Finance (principal andinterest as of 5 September 1979) (1,022,916.66)

Deposits in respondent's bank accounts with petitionerCitibank (31,079.14)

Proceeds of respondent's money market placements anddollar accounts with Citibank-Geneva (pesoequivalent as of 26 October 1979) (1,102,944.78)

Balance of respondent's obligation P0.00===========

Respondent, however, denied having any outstanding loans with petitionerCitibank. She likewise denied that she was duly informed of the off-setting orcompensation thereof made by petitioner Citibank using her deposits and moneymarket placements with petitioners. Hence, respondent sought to recover her depositsand money market placements. cADEHI

Respondent instituted a complaint for "Accounting, Sum of Money andDamages" against petitioners, docketed as Civil Case No. 11336, before the RegionalTrial Court (RTC) of Makati City. After trial proper, which lasted for a decade, theRTC rendered a Decision 4(4) on 24 August 1995, the dispositive portion of whichreads

WHEREFORE, in view of all the foregoing, decision is hereby renderedas follows:

(1) Declaring as illegal, null and void the setoff effected by thedefendant Bank [petitioner Citibank] of plaintiff's [respondent Sabeniano] dollardeposit with Citibank, Switzerland, in the amount of US$149,632.99, andordering the said defendant [petitioner Citibank] to refund the said amount tothe plaintiff with legal interest at the rate of twelve percent (12%) per annum,compounded yearly, from 31 October 1979 until fully paid, or its pesoequivalent at the time of payment;

(2) Declaring the plaintiff [respondent Sabeniano] indebted to thedefendant Bank [petitioner Citibank] in the amount of P1,069,847.40 as of 5September 1979 and ordering the plaintiff [respondent Sabeniano] to pay saidamount, however, there shall be no interest and penalty charges from the timethe illegal setoff was effected on 31 October 1979;

(3) Dismissing all other claims and counterclaims interposed by theparties against each other.

PJG


Costs against the defendant Bank.

All the parties appealed the afore-mentioned RTC Decision to the Court ofAppeals, docketed as CA-G.R. CV No. 51930. On 26 March 2002, the appellate courtpromulgated its Decision, 5(5) ruling entirely in favor of respondent, to wit

Wherefore, premises considered, the assailed 24 August 1995 Decisionof the court a quo is hereby AFFIRMED with MODIFICATION, as follows:

1. Declaring as illegal, null and void the set-off effected by thedefendant-appellant Bank of the plaintiff-appellant's dollar deposit withCitibank, Switzerland, in the amount of US$149,632.99, and orderingdefendant-appellant Citibank to refund the said amount to the plaintiff-appellantwith legal interest at the rate of twelve percent (12%) per annum, compoundedyearly, from 31 October 1979 until fully paid, or its peso equivalent at the timeof payment;

2. As defendant-appellant Citibank failed to establish by competentevidence the alleged indebtedness of plaintiff-appellant, the set-off ofP1,069,847.40 in the account of Ms. Sabeniano is hereby declared as withoutlegal and factual basis;

3. As defendants-appellants failed to account the followingplaintiff-appellant's money market placements, savings account and currentaccounts, the former is hereby ordered to return the same, in accordance withthe terms and conditions agreed upon by the contending parties as evidenced bythe certificates of investments, to wit:

(i) Citibank NNPN Serial No. 023356 (Cancels andSupersedes NNPN No. 22526) issued on 17 March 1977, P318,897.34with 14.50% interest p.a.;

(ii) Citibank NNPN Serial No. 23357 (Cancels and SupersedesNNPN No. 22528) issued on 17 March 1977, P203,150.00 with 14.50interest p.a.;

(iii) FNCB NNPN Serial No. 05757 (Cancels and SupersedesNNPN No. 04952), issued on 02 June 1977, P500,000.00 with 17%interest p.a.;

(iv) FNCB NNPN Serial No. 05758 (Cancels and SupersedesNNPN No. 04962), issued on 02 June 1977, P500,000.00 with 17%interest per annum;

PJG


(v) The Two Million (P2,000,000.00) money marketplacements of Ms. Sabeniano with the Ayala Investment &Development Corporation (AIDC) with legal interest at the rate oftwelve percent (12%) per annum compounded yearly, from 30September 1976 until fully paid;

4. Ordering defendants-appellants to jointly and severally pay theplaintiff-appellant the sum of FIVE HUNDRED THOUSAND PESOS(P500,000.00) by way of moral damages, FIVE HUNDRED THOUSANDPESOS (P500,000.00) as exemplary damages, and ONE HUNDREDTHOUSAND PESOS (P100,000.00) as attorney's fees.

Acting on petitioners' Motion for Partial Reconsideration, the Court of Appealsissued a Resolution, 6(6) dated 20 November 2002, modifying its earlier Decision,thus

WHEREFORE, premises considered, the instant Motion forReconsideration is PARTIALLY GRANTED as Sub-paragraph (V) paragraph3 of the assailed Decision's dispositive portion is hereby ordered DELETED.

The challenged 26 March 2002 Decision of the Court is AFFIRMEDwith MODIFICATION.

Since the Court of Appeals Decision, dated 26 March 2002, as modified by theResolution of the same court, dated 20 November 2002, was still principally in favorof respondent, petitioners filed the instant Petition for Review on Certiorari underRule 45 of the Revised Rules of Court. After giving due course to the instant Petition,this Court promulgated on 16 October 2006 its Decision, now subject of petitioners'Motion for Partial Reconsideration.

Among the numerous grounds raised by petitioners in their Motion for PartialReconsideration, this Court shall address and discuss herein only particular points thathad not been considered or discussed in its Decision. Even in consideration of thesepoints though, this Court remains unconvinced that it should modify or reverse in anyway its disposition of the case in its earlier Decision.

As to the off-setting or compensationof respondent's outstanding loanbalance with her dollar deposits inCitibank-Geneva

Petitioners' take exception to the following findings made by this Court in its

PJG


Decision, dated 16 October 2006, disallowing the off-setting or compensation of thebalance of respondent's outstanding loans using her dollar deposits inCitibank-Geneva

Without the Declaration of Pledge, petitioner Citibank had no authorityto demand the remittance of respondent's dollar accounts with Citibank-Genevaand to apply them to her outstanding loans. It cannot effect legal compensationunder Article 1278 of the Civil Code since, petitioner Citibank itself admittedthat Citibank-Geneva is a distinct and separate entity. As for the dollaraccounts, respondent was the creditor and Citibank-Geneva is the debtor; and asfor the outstanding loans, petitioner Citibank was the creditor and respondentwas the debtor. The parties in these transactions were evidently not the principalcreditor of each other. DcHaET

Petitioners maintain that respondent's Declaration of Pledge, by virtue ofwhich she supposedly assigned her dollar accounts with Citibank-Geneva as securityfor her loans with petitioner Citibank, is authentic and, thus, valid and binding uponrespondent. Alternatively, petitioners aver that even without said Declaration ofPledge, the off-setting or compensation made by petitioner Citibank usingrespondent's dollar accounts with Citibank-Geneva to liquidate the balance of heroutstanding loans with Citibank-Manila was expressly authorized by respondentherself in the promissory notes (PNs) she signed for her loans, as well as sanctionedby Articles 1278 to 1290 of the Civil Code. This alternative argument is anchored onthe premise that all branches of petitioner Citibank in the Philippines and abroad arepart of a single worldwide corporate entity and share the same juridical personality. Inconnection therewith, petitioners deny that they ever admitted that Citibank-Manilaand Citibank-Geneva are distinct and separate entities.

Petitioners call the attention of this Court to the following provision found inall of the PNs 7(7) executed by respondent for her loans

At or after the maturity of this note, or when same becomes due underany of the provisions hereof, any money, stocks, bonds, or other property of anykind whatsoever, on deposit or otherwise, to the credit of the undersigned on thebooks of CITIBANK, N.A. in transit or in their possession, may without noticebe applied at the discretion of the said bank to the full or partial payment of thisnote.

It is the petitioners' contention that the term "Citibank, N.A." used therein should bedeemed to refer to all branches of petitioner Citibank in the Philippines and abroad;thus, giving petitioner Citibank the authority to apply as payment for the PNs evenrespondent's dollar accounts with Citibank-Geneva. Still proceeding from the premise

PJG


that all branches of petitioner Citibank should be considered as a single entity, then itshould not matter that the respondent obtained the loans from Citibank-Manila andher deposits were with Citibank-Geneva. Respondent should be considered the debtor(for the loans) and creditor (for her deposits) of the same entity, petitioner Citibank.Since petitioner Citibank and respondent were principal creditors of each other, incompliance with the requirements under Article 1279 of the Civil Code, 8(8) then theformer could have very well used off-setting or compensation to extinguish theparties' obligations to one another. And even without the PNs, off-setting orcompensation was still authorized because according to Article 1286 of the CivilCode, "Compensation takes place by operation of law, even though the debts may bepayable at different places, but there shall be an indemnity for expenses of exchangeor transportation to the place of payment."

Pertinent provisions of Republic Act No. 8791, otherwise known as theGeneral Banking Law of 2000, governing bank branches are reproduced below

SEC. 20. Bank Branches. Universal or commercial banks mayopen branches or other offices within or outside the Philippines upon priorapproval of the Bangko Sentral.

Branching by all other banks shall be governed by pertinent laws.

A bank may, subject to prior approval of the Monetary Board, use any orall of its branches as outlets for the presentation and/or sale of the financialproducts of its allied undertaking or its investment house units.

A bank authorized to establish branches or other offices shall beresponsible for all business conducted in such branches and offices to the sameextent and in the same manner as though such business had all been conductedin the head office. A bank and its branches and offices shall be treated as oneunit.

xxx xxx xxx

SEC. 72. Transacting Business in the Philippines. The entry offoreign banks in the Philippines through the establishment of branches shall begoverned by the provisions of the Foreign Banks Liberalization Act.

The conduct of offshore banking business in the Philippines shall begoverned by the provisions of Presidential Decree No. 1034, otherwise knownas the "Offshore Banking System Decree."

xxx xxx xxx

PJG


SEC. 74. Local Branches of Foreign Banks. In case of a foreignbank which has more than one (1) branch in the Philippines, all such branchesshall be treated as one (1) unit for the purpose of this Act, and all references tothe Philippine branches of foreign banks shall be held to refer to such units.

SEC. 75. Head Office Guarantee. In order to provide effectiveprotection of the interests of the depositors and other creditors of Philippinebranches of a foreign bank, the head office of such branches shall fullyguarantee the prompt payment of all liabilities of its Philippine branch. DSETcC

Residents and citizens of the Philippines who are creditors of a branch inthe Philippines of a foreign bank shall have preferential rights to the assets ofsuch branch in accordance with existing laws.

Republic Act No. 7721, otherwise known as the Foreign Banks LiberalizationLaw, lays down the policies and regulations specifically concerning the establishmentand operation of local branches of foreign banks. Relevant provisions of the saidstatute read

Sec. 2. Modes of Entry. The Monetary Board may authorizeforeign banks to operate in the Philippine banking system through any of thefollowing modes of entry: (i) by acquiring, purchasing or owning up to sixtypercent (60%) of the voting stock of an existing bank; (ii) by investing in up tosixty percent (60%) of the voting stock of a new banking subsidiaryincorporated under the laws of the Philippines; or (iii) by establishing brancheswith full banking authority: Provided, That a foreign bank may avail itself ofonly one (1) mode of entry: Provided, further, That a foreign bank or aPhilippine corporation may own up to a sixty percent (60%) of the voting stockof only one (1) domestic bank or new banking subsidiary.

Sec. 5. Head Office Guarantee. The head office of foreign bankbranches shall guarantee prompt payment of all liabilities of its Philippinebranches.

It is true that the afore-quoted Section 20 of the General Banking Law of 2000expressly states that the bank and its branches shall be treated as one unit. It should bepointed out, however, that the said provision applies to a universal 9(9) or commercialbank, 10(10) duly established and organized as a Philippine corporation in accordancewith Section 8 of the same statute, 11(11) and authorized to establish branches withinor outside the Philippines.

The General Banking Law of 2000, however, does not make the same

PJG


categorical statement as regards to foreign banks and their branches in thePhilippines. What Section 74 of the said law provides is that in case of a foreign bankwith several branches in the country, all such branches shall be treated as one unit.As to the relations between the local branches of a foreign bank and its head office,Section 75 of the General Banking Law of 2000 and Section 5 of the Foreign BanksLiberalization Law provide for a "Home Office Guarantee," in which the head officeof the foreign bank shall guarantee prompt payment of all liabilities of its Philippinebranches. While the Home Office Guarantee is in accord with the principle that theselocal branches, together with its head office, constitute but one legal entity, it does notnecessarily support the view that said principle is true and applicable in allcircumstances.

The Home Office Guarantee is included in Philippine statutes clearly for theprotection of the interests of the depositors and other creditors of the local branches ofa foreign bank. 12(12) Since the head office of the bank is located in another countryor state, such a guarantee is necessary so as to bring the head office within Philippinejurisdiction, and to hold the same answerable for the liabilities of its Philippinebranches. Hence, the principle of the singular identity of that the local branches andthe head office of a foreign bank are more often invoked by the clients in order toestablish the accountability of the head office for the liabilities of its local branches. Itis under such attendant circumstances in which the American authorities andjurisprudence presented by petitioners in their Motion for Partial Reconsiderationwere rendered.

Now the question that remains to be answered is whether the foreign bank canuse the principle for a reverse purpose, in order to extend the liability of a client to theforeign bank's Philippine branch to its head office, as well as to its branches in othercountries. Thus, if a client obtains a loan from the foreign bank's Philippine branch,does it absolutely and automatically make the client a debtor, not just of thePhilippine branch, but also of the head office and all other branches of the foreignbank around the world? This Court rules in the negative. EIcSTD

There being a dearth of Philippine authorities and jurisprudence on the matter,this Court, just as what petitioners have done, turns to American authorities andjurisprudence. American authorities and jurisprudence are significant hereinconsidering that the head office of petitioner Citibank is located in New York, UnitedStates of America (U.S.A.).

Unlike Philippine statutes, the American legislation explicitly defines therelations among foreign branches of an American bank. Section 25 of the United

PJG


States Federal Reserve Act 13(13) states that

Every national banking association operating foreign branches shallconduct the accounts of each foreign branch independently of the accounts ofother foreign branches established by it and of its home office, and shall at theend of each fiscal period transfer to its general ledger the profit or loss accruedat each branch as a separate item.

Contrary to petitioners' assertion that the accounts of Citibank-Manila andCitibank-Geneva should be deemed as a single account under its head office, theforegoing provision mandates that the accounts of foreign branches of an Americanbank shall be conducted independently of each other. Since the head office ofpetitioner Citibank is in the U.S.A., then it is bound to treat its foreign branches inaccordance with the said provision. It is only at the end of its fiscal period that thebank is required to transfer to its general ledger the profit or loss accrued at eachbranch, but still reporting it as a separate item. It is by virtue of this provision that theCircuit Court of Appeals of New York declared in Pan-American Bank and Trust Co.v. National City Bank of New York 14(14) that a branch is not merely a teller'swindow; it is a separate business entity.

The circumstances in the case of McGrath v. Agency of Chartered Bank ofIndia, Australia & China 15(15) are closest to the one at bar. In said case, theChartered Bank had branches in several countries, including one in Hamburg,Germany and another in New York, U.S.A., and yet another in London, UnitedKingdom. The New York branch entered in its books credit in favor of four Germanfirms. Said credit represents collections made from bills of exchange delivered by thefour German firms. The same four German firms subsequently became indebted tothe Hamburg branch. The London branch then requested for the transfer of the creditin the name of the German firms from the New York branch so as to be applied orsetoff against the indebtedness of the same firms to the Hamburg branch. One of thequestion brought before the U.S. District Court of New York was "whether or not thedebts and the alleged setoffs thereto are mutual," which could be answered bydetermining first whether the New York and Hamburg branches of Chartered Bankare individual business entities or are one and the same entity. In denying the right ofthe Hamburg branch to setoff, the U.S. District Court ratiocinated that

The structure of international banking houses such as Chartered bankdefies one rigorous description. Suffice it to say for present analysis, branchesor agencies of an international bank have been held to be independent entitiesfor a variety of purposes (a) deposits payable only at branch where made;Mutaugh v. Yokohama Specie Bank, Ltd., 1933, 149 Misc. 693, 269 N.Y.S. 65;

PJG


Bluebird Undergarment Corp. v. Gomez, 1931, 139 Misc. 742, 249 N.Y.S. 319;(b) checks need be honored only when drawn on branch where deposited;Chrzanowska v. Corn Exchange Bank, 1916, 173 App. Div. 285, 159 N.Y.S.385, affirmed 1919, 225 N.Y. 728, 122 N.E. 877; subpoena duces tecum onforeign bank's record barred; In re Harris, D.C.S.D.N.Y. 1939, 27 F. Supp. 480;(d) a foreign branch separate for collection of forwarded paper; Pan-AmericanBank and Trust Company v. National City Bank of New York, 2 Cir., 1925, 6 F.2d 762, certiorari denied 1925, 269 U.S. 554, 46 S. Ct. 18, 70 L. Ed. 408. Thusin law there is nothing innately unitary about the organization ofinternational banking institutions. IHcTDA

Defendant, upon its oral argument and in its brief, relies heavily onSokoloff v. National City Bank of New York, 1928, 250 N.Y. 69, 164 N.E. 745,as authority for the proposition that Chartered Bank, not the Hamburg or NewYork Agency, is ultimately responsible for the amounts owing its Germancustomers and, conversely, it is to Chartered Bank that the German firms owetheir obligations. The Sokoloff case, aside from its violently different factsituation, is centered on the legal problem of default of payment and consequentbreach of contract by a branch bank. It does not stand for the principle that inevery instance an international bank with branches is but one legal entity forall purposes. The defendant concedes in its brief (p. 15) that there are purposesfor which the various agencies and branches of Chartered Bank may be treatedin law as separate entities. I fail to see the applicability of Sokoloff either as aguide to or authority for the resolution of this problem. The facts before me andthe cases catalogued supra lend weight to the view that we are dealing here withAgencies independent of one another.

xxx xxx xxx

I hold that for instant purposes the Hamburg Agency and defendant wereindependent business entities, and the attempted setoff may not be utilized bydefendant against its debt to the German firms obligated to the HamburgAgency.

Going back to the instant Petition, although this Court concedes that all thePhilippine branches of petitioner Citibank should be treated as one unit with its headoffice, it cannot be persuaded to declare that these Philippine branches are likewise asingle unit with the Geneva branch. It would be stretching the principle way beyondits intended purpose.

Therefore, this Court maintains its original position in the Decision that theoff-setting or compensation of respondent's loans with Citibank-Manila using herdollar accounts with Citibank-Geneva cannot be effected. The parties cannot be

PJG


considered principal creditor of the other. As for the dollar accounts, respondent wasthe creditor and Citibank-Geneva was the debtor; and as for the outstanding loans,petitioner Citibank, particularly Citibank-Manila, was the creditor and respondent wasthe debtor. Since legal compensation was not possible, petitioner Citibank could onlyuse respondent's dollar accounts with Citibank-Geneva to liquidate her loans if shehad expressly authorized it to do so by contract.

Respondent cannot be deemed to have authorized the use of her dollar depositswith Citibank-Geneva to liquidate her loans with petitioner Citibank when she signedthe PNs 16(16) for her loans which all contained the provision that

At or after the maturity of this note, or when same becomes due underany of the provisions hereof, any money, stocks, bonds, or other property of anykind whatsoever, on deposit or otherwise, to the credit of the undersigned on thebooks of CITIBANK, N.A. in transit or in their possession, may without noticebe applied at the discretion of the said bank to the full or partial payment of thisnote.

As has been established in the preceding discussion, "Citibank, N.A." can only referto the local branches of petitioner Citibank together with its head office. Unless thereis any showing that respondent understood and expressly agreed to a morefar-reaching interpretation, the reference to Citibank, N.A. cannot be extended to allother branches of petitioner Citibank all over the world. Although theoretically, booksof the branches form part of the books of the head office, operationally andpractically, each branch maintains its own books which shall only be later integratedand balanced with the books of the head office. Thus, it is very possible to identifyand segregate the books of the Philippine branches of petitioner Citibank from thoseof Citibank-Geneva, and to limit the authority granted for application as payment ofthe PNs to respondent's deposits in the books of the former.

Moreover, the PNs can be considered a contract of adhesion, the PNs being instandard printed form prepared by petitioner Citibank. Generally, stipulations in acontract come about after deliberate drafting by the parties thereto, there are certaincontracts almost all the provisions of which have been drafted only by one party,usually a corporation. Such contracts are called contracts of adhesion, because theonly participation of the party is the affixing of his signature or his "adhesion"thereto. This being the case, the terms of such contract are to be construed strictlyagainst the party which prepared it. 17(17)

As for the supposed Declaration of Pledge of respondent's dollar accounts withCitibank-Geneva as security for the loans, this Court stands firm on its ruling that the

PJG


non-production thereof is fatal to petitioners' cause in light of respondent's claim thather signature on such document was a forgery. It bears to note that the original of theDeclaration of Pledge is with Citibank-Geneva, a branch of petitioner Citibank. Asbetween respondent and petitioner Citibank, the latter has better access to thedocument. The constant excuse forwarded by petitioner Citibank thatCitibank-Geneva refused to return possession of the original Declaration of Pledge toCitibank-Manila only supports this Court's finding in the preceding paragraphs thatthe two branches are actually operating separately and independently of each other.aAcHCT

Further, petitioners keep playing up the fact that respondent, at the beginningof the trial, refused to give her specimen signatures to help establish whether hersignature on the Declaration of Pledge was indeed forged. Petitioners seem to forgetthat subsequently, respondent, on advice of her new counsel, already offered tocooperate in whatever manner so as to bring the original Declaration of Pledge beforethe RTC for inspection. The exchange of the counsels for the opposing sides duringthe hearing on 24 July 1991 before the RTC reveals the apparent willingness ofrespondent's counsel to undertake whatever course of action necessary for theproduction of the contested document, and the evasive, non-committal, anduncooperative attitude of petitioners' counsel. 18(18)

Lastly, this Court's ruling striking down the Declaration of Pledge is notentirely based on respondent's allegation of forgery. In its Decision, this Court alreadyextensively discussed why it found the said Declaration of Pledge highly suspiciousand irregular, to wit

First of all, it escapes this Court why petitioner Citibank took care tohave the Deeds of Assignment of the PNs notarized, yet left the Declaration ofPledge unnotarized. This Court would think that petitioner Citibank would takegreater cautionary measures with the preparation and execution of theDeclaration of Pledge because it involved respondent's "all present and futurefiduciary placements" with a Citibank branch in another country, specifically, inGeneva, Switzerland. While there is no express legal requirement that theDeclaration of Pledge had to be notarized to be effective, even so, it could notenjoy the same prima facie presumption of due execution that is extended tonotarized documents, and petitioner Citibank must discharge the burden ofproving due execution and authenticity of the Declaration of Pledge.

Second, petitioner Citibank was unable to establish the date when theDeclaration of Pledge was actually executed. The p

Date post:	06-Nov-2015
Category:	Documents
Upload:	pjgalera
View:	190 times
Download:	3 times

Sundiang - Complete Cases

Documents