FIRST DIVISION

[G.R. No. L-7271. August 30, 1957.]

PHILIPPINE NATIONAL BANK, plaintiff-appellant, vs. JOSE C. ZULUETA,
defendant-appellee.
Natalio M. Balboa and Ramon B. de los Reyes for appellant.
Lorenzo F. Miravite for appellee.
SYLLABUS
1. BANKS AND BANKING; OBLIGATIONS AND CONTRACTS; EXCISE TAX, REPUBLIC
ACT 601; OBLIGATIONS INCURRED BEFORE ITS APPROVAL. — An obligation which has
been incurred before the creation of the 17% tax, under Republic Act 601, may not be
validly burdened with such tax, because the law imposing it could not be deemed to
have impaired obligations already existing at the time of its approval.
2. BILLS AND NOTES; FOREIGN BILLS OF EXCHANGE. — When a foreign bill of
exchange expressed in foreign money becomes payable here, it is payable at the rate
of exchange in effect on the day it should have been paid not at the rate of exchange
prevailing when action therein is brought or when judgment is rendered.
DECISION
BENGZON, J p:
In the Manila court of first instance, the Philippine National Bank sued the
defendant upon a letter of credit and a draft for the amount of $14,449.15. Although
willing to pay the equivalent in pesos of the draft, plus bank charges, the defendant
objected to the 17% excise tax imposed by Republic Act No. 601which the Bank tried
to collect. Both documents, he contended, had been issued and had matured before
the approval of said Act, therefore the excise tax should not be charged.
After trial, the court rendered judgment exempting defendant from the 17%
excise tax; but ordered him to deliver to plaintiff the sum of P37,622.11 plus daily
interest of P3.9938 on P29,154.55 beginning from January 9, 1953.
The plaintiff appealed, insisting on the right to collect 17% excise or exchange
tax. This is the only issue between the parties now.
For a statement of the facts we may quote from plaintiff's brief. "On October 26,
1948, Defendant-Appellee applied for a commercial letter of credit with Plaintiff-
Appellant, Philippine National Bank (Manila) and was granted L/C No. 36171 (Exhibit
"B") on November 6, 1948, in favor of Otis Elevator Co., 260 Eleventh Avenue, New
York City, U.S.A., for $14,449.15 for the purchase of an electric passenger elevator; on
May 17, 1949, and under the said letter of credit (Exhibit "B"), Otis Elevator Co. drew a
90 day sight draft for $14,449.15 (Exhibit "A") which draft was duly presented to and
accepted by Defendant-Appellee on July 6, 1949. Said acceptance matured on October
4, 1949. Upon Defendant-Appellee's signing a 90 day trust receipt (Exhibit "C") on June
3, 1949, Plaintiff-Appellant released to Defendant-Appellee the covering documents of
the shipment. In the meantime, debit advice (Exhibit "G") was received from Plaintiff-
Appellant's New York Agency to the effect that it advanced or paid the draft (Exhibit
"A") to Otis Elevator Co. on May 17, 1949, and charged Plaintiff-Appellant the sum of
$14,467.21 representing the face value of the draft (Exhibit "A") plus $18.06 as 1/8 of
1% commission. After the maturity date (October 4, 1949) Plaintiff- Appellant
presented the draft to Defendant-Appellee for payment but the latter failed, neglected
and refused to pay.
During its special session in January, 1951, Congress passed House Bill No. 1513,
now Republic Act No. 601, approved on March 28, 1951, imposing a 17% special excise
tax (otherwise known as foreign exchange tax) on the value in Philippine peso of
foreign exchange sold by the Central Bank of the Philippines or its authorized agents.
Plaintiff-appellant, as any other commercial bank in the Philippines, is an authorized
agent of the Central Bank of the Philippines.
On October 17, 1952, and January 18, 1953, Plaintiff-Appellant sent bills or
statements of collection (Exhibits "D" and "D-1") to Defendant-Appellee but the latter
failed and refused to effect payment thereof. In those statements, the sum of
P4,955.74 was included representing the 17% special excise tax on the peso value of
the draft for US $14,449.15 (Exhibit "A"), . . ."
Defendant's application for a letter of credit partly read as follows:
"Please arrange by cable for the establishment of an Irrevocable Letter of
Credit on New York in favor of Otis Elevator Co., 260 Eleventh Avenue, New York City
for account of Hon. Jose C. Zulueta for the sum of FOURTEEN THOUSAND FOUR
HUNDRED FORTY-NINE AND 15/100 ($14,449.15) DOLLARS against drawn at NINE
DAYS accompanied by shipping documents covering of ONE COMPLETE ELECTRIC
PASSENGER ELEVATOR . . .
Drafts must be drawn and presented or negotiated not later than May 31,
1949.
 IN CONSIDERATION THEREOF, I/we promise and agree to pay you at maturity in
Philippine Currency, the equivalent of the above amount or such portion thereof as
may be drawn or paid upon the faith of said credit, together with your usual charges,
and I/we authorize you and your respective correspondents to pay or to accept drafts
under this credit, . . ."

And the draft issued thereunder (Exhibit A) was negotiable and addressed to herein
defendant as the drawee.
From plaintiff's statement of its position it is not clear whether recovery is
demanded upon the letter of credit, or upon the draft Exhibit A. Plaintiff may,
undoubtedly, proceed on either cause of action. (See Art. 571 Code of Commerce; Sec.
51 Negotiable Instruments Law.).
Had the plaintiff elected to recover on said letter of credit, then it would meet
with the doctrines in Araneta vs. Philippine National Bank, 95 Phil., 160, 50 Off. Gaz.
(11) 5350), According to the majority opinion in that case, plaintiff should receive the
equivalent in pesos, on May 17, 1949, of what the New York Agency paid to Otis
Elevator, i.e. $14,467.21 (plus bank fees of course.) According to the minority opinion,
the equivalent in pesos of the same amount of dollars on October 4, 1949. No. 17%
tax on both dates. In converting dollars into pesos, no 17% exchange tax would be
imposable, since it was created only in March 1951. The plaintiff knows the case, for it
was a party to it; and anticipating, in this appeal, the obvious conclusions, it insists not
so much on the letter of credit, as on the bill of exchange Exhibit A 1 . As stated before, such
draft was drawn by Otis Elevator Co. in New York. It was addressed to defendant as drawee, who is due course accepted it.
There is no question that upon accepting it, defendant became a party primarily liable 2 ; and the holder (Philippine
National Bank) may sue him, even if there had been no presentation for payment on the day of maturity. (Sec. 70
Negotiable Instruments Law.)

Admittedly, defendant's responsibility is for $14,449.15 due in Manila on

October 4, 1949 (plus bank fees). He is under obligation to deliver such amount in
pesos as were the equivalent of $14,449.15. At what rate of exchange? The rate
prevailing on the day of issuance, day of acceptance, day of maturity, the day suit is
filed, or that prevailing on the day judgment is rendered requiring him to pay? Herein
lies the center of the controversy. Appellant will win this appeal only if the rate on the
last two days above mentioned is held to be the legal rate.
The document is negotiable and is governed by the Negotiable Instruments Law.
But this statute does not contain any express provision on the question. We know the
draft is a foreign bill of exchange, because, drawn in New York, it is payable here. (Sec.
129 Negotiable Instruments Law.) We also know that although the amount payable is
expressed in dollars-not current money here-it is still negotiable, for it may be
discharged with pesos of equivalent amount 3 . The problem arises when we try to determine the
"equivalent amount", because the rate of exchange fluctuates from day to day.

There are decisions in America to the effect that, "the rate of exchange in effect
at the time the bill should have been paid" controls. (11 C.J.S. p. 264.)
Such decisions agree with the provisions of the Bills of Exchange Act of England
4 and could be taken as enunciating the correct principle, inasmuch as our Negotiable Instruments Law, practically copied
the American Uniform Negotiable Instruments Law which in turn was based largely on the Bills of Exchange Act of England
of 1882. In fact we practically followed this rule in Westminster Bank vs. K. Nassoor, 58 Phil. 855.
There is one decision applying the rate of exchange at the time judgment is
entered. (11 C. J. S. p. 264.) 5
This decision however seems not to have taken into account the Bills of
Exchange Act above mentioned. And we have rejected its view in the Westminster
case, supra. Furthermore it related to a bill expressly made payable in a foreign
currency-which is not the case here. And the theory would probably produce
undesirable effects upon commercial documents, for it would make the amount
uncertain, the parties to the bill not being able to foresee the day judgment would be
rendered 6
But, the appellant argues, the defendant had promised to pay $14,419.15 in
dollars; therefore he must be ordered to pay the sum in dollars at current ratesplus
17%.
The argument rests on a wrong premise. Defendant had not promised to pay in
dollars. He agreed to pay the equivalent of 14,419.15 dollars, in Philippine currency 7
But if we admit that defendant had agreed to pay in dollars, then we have to
apply Republic Act No. 529 and say that his obligation "shall be discharged in Philippine
currency measured at the prevailing rates of exchange at the time the obligation was
incurred."
Now then, Zulueta's obligation having been incurred 8 before the creation of the 17% tax, it
may not be validly burdened with such tax, because the law imposing it could not be deemed to have impaired obligations
already existing at the time of its approval.

The plaintiff's theory seems to be that in remitting dollars to its New York
Agency, after it collects from defendant, it has to pay for the said excise tax. 9 The trial
judge expressed the belief that such amount had been remitted before the enactment of Republic
Act 601, because considering the practice of banks of replenishing their agencies
abroad with necessary funds, he deemed it improbable that the Manila Office of the
Bank — in two years — had not reimbursed its New York Agency for the amount
advanced on account of the draft Exhibit A. This belief most probably accorded with
reality; because as early as May 17, 1949 (Exhibit G) the New York Agency had
"charged" the amount of this draft against the account of the Manila office there, —
which means the Agency had reimbursed itself the amount of the draft out of the
funds of the Manila Office then in its possession (in New York) or coming to its
possession afterwards. And it is unbelievable that in two years the Manila office never
had in New York sufficient funds to effect the reimbursement.

In fact, the statement of account rendered by plaintiff to defendant on October

17, 1952, (Exhibit D) enumerated these charges:
"To your acceptance amounting to $14,449.15
Plus Remitter's Commission 18.06
$14,567.21
(Converted at 3/4 % P29,151.43
5% int. 5/17/49-10/19/52-1251 da. 4,995.68
P34,147.11

10% comm. on $14,449.15 P2,911.51

Documentary stamps 8.70
Air Mail 2.00
17% Excise Tax on P29,151.43 4,955.74
Other charges 3.00"

From the above it may be deduced that the amount of the draft had been
remitted or paid to the New York Agency in May 1949, for the reason that Zulueta is
charged with remitter's commission" and 5% interest on the amount of the draft (and
such commission) beginning from May 17, 1949, This necessarily implies that in
accordance with Exhibit G, the New York Agency had been reimbursed of the draft's
amount (or such amount was remitted) on May 17, 1949. 10 Now, in May 1949 no 17% exchange
tax was payable upon such remittance; and the Manila office did not pay it. Therefore Zulueta should not pay it too.

In view of the foregoing the judgment will be affirmed, with costs against
appellant. So ordered.
Paras, C.J., Padilla, Montemayor and Bautista Angelo, JJ., concur.

Separate Opinions
REYES, A., J., concurring:
Plaintiff in this case seeks reimbursement in Philippine currency for the amount
in dollars advanced by it through its New York agency to meet a draft drawn against
defendant and accepted by the latter for a valuable consideration. Plaintiff's right to
such reimbursement is not questioned. What is disputed is its pretended right to add
to the amount of the draft the excise tax of 17% which plaintiff would have to pay to
the Government if it were to remit now to New York the necessary amount of dollars
that its agency there had paid on the draft.
I cannot bring myself to believe that it is only now that plaintiff has thought of
sending dollars to New York to replace the amount advanced by its agency. As
intimated in the majority opinion and in consonance with good banking practice, the
necessary remittance must have been effected long ago, that is, long before the
creation of the excise tax on foreign exchange in March, 1951. Plaintiff, therefore,
could not have paid such tax, and not having done so it has no right to get
reimbursement therefor from defendant.
I do not think that defendant could be legally made to pay more than what
plaintiff had actually advanced for him, aside from commission and other charges, on
the theory that the Philippine peso has depreciated in value with respect to the
American dollar. Legally, it has not. The legal rate of exchange between the two
currencies is still two to one. What happened is that with the creation of the excise tax
in 1951, it would now be more costly to remit dollars abroad. But why should plaintiff
make that remittance now when, as already stated, it must have already done so long
before the creation of the excise tax on foreign exchange?
Lastly, a debtor cannot be charged with bad faith for refusing to pay that which
he should not pay.
FELIX, J., concurring:
The decision rendered in this case, penned by Mr. Justice Cesar Bengzon,
perfectly reflects and delivers the opinion of the majority of this Court and I subscribe
to each and every statement made and argument adduced therein. This being so, it
would seem that any concurring or supporting opinion is quite superfluous and I would
not have taken the task of writing further in the matter were it not for the fact that in
the dissenting opinion it is stated that:
"It cannot be justly contended that if a debtor had borrowed, say $10,000, the lender
should be satisfied with eight or nine thousand. Yet that is what the majority's decision
actually amounts to".

The writer further says that:

 "the majority opinion has the merit of giving the bank a costly lesson on the
advantages of not considering political influence in the making and collecting of its
loans; but I am afraid the experience will be too quickly forgotten to even palliate the
sacrifice of fundamental justice to technical considerations".

I, certainly, cannot leave these statements pass unanswered.

To begin with, I right say that if any lesson has been given by the majority of this
Court to the plaintiff bank, it is not in this case but in the case of Araneta vs.The
Philippine National Bank (G. R. No. L-4633, May 31, 1954), cited in the majority
decision, where the latter was a party to that case and a similar doctrine was laid
down. Coming now to the bone of contention, I notice that the dissenting Justice views
the matter involved in the controversy as a loan and submits that the question really at
issue can be boiled down to the proposition of "whether it is the lender or the
borrower who should bear the added cost of the depreciation of the peso in relation to
the dollar".
In this connection, I might say that defendant's obligation to the plaintiff would
have been settled some years ago were it not for the fact that the Bank insisted in
collecting the special excise tax of 17 per cent on foreign exchange transactions
imposed by Republic Act No. 601 which entered into effect on March 28, 1951, and
was not yet in force at the time the obligation of the defendant matured on October 4,
1948. And even if we look at the case as a loan and apply to the transaction the
provisions of Article 312, paragraph 1, of the Code of Commerce, cited by the
dissenting Justice, yet We could not, under the facts and circumstances of the case
that cannot be denied, logically arrive at the same conclusion that he has come to.
And the reason is obvious. In the first place, We have to take into account that
the New York agency of Philippine National Bank and its central office in Manila are not
separate and independent entities. That is why it is the Philippine National Bank
(Manila office) and not the New York agency of said Bank that is the plaintiff in this
case. Consequently, any payment made to plaintiffs central office in Manila for
obligations that any debtor may have contracted with said New York agency is and has
to be considered as a payment or settlement of said obligations, there being no need
to attain this result that the plaintiff would adjust is accounts with its agency, or
transmit to the latter the amounts received from the debtor.
In the second place, the obligation contracted by the defendant was not to pay
$14,419.15 in dollars, but the equivalent of $14,419.15 dollars, in Philippine currency.
So, when defendant's obligation matured on October 4, 1949, the defendant had to
pay to the Bank not the sum of $14,467.21 representing the face value of the draft
Exhibit A, plus $18.06 as 1/8 of 1 per cent commission, but its equivalent in pesos at
the time of such maturity, and had the defendant failed to satisfy then his obligation,
he could be held liable to pay in addition thereof, the corresponding interests for the
period of default and nothing else. And that is precisely what defendant is willing to
pay.
From the foregoing, I hope to have made clear my stand on the matter.
REYES, J.B.L., J., dissenting:
As I view it, the question before this Court is whether it is the lender or the
defaulting borrower who should bear the added cost of the depreciation of the peso in
relation to the dollar.
When in 1949 the Philippine National Bank remitted to the Otis Elevator Co. the
$14,449.15 for the account of Zulueta, the Bank, in effect, loaned to Zulueta said
amount on the strength of his express engagement to "pay at maturity in Philippine
Currency, the equivalent of the above amount," which was a promise to pay such
amount in Philippine pesos as could be converted into $14,449.15. There is no
question that Zulueta failed to do so, and has refused to do so up to the present. In the
meantime, in 1951, the Legislature enacted Rep. Act No. 601, imposing a 17% special
excise tax on foreign exchange transactions, so that thereafter one had to pay 234
pesos for every $100, instead of P200 as heretofore. Should Zulueta be required to pay
for the dollars at the new rate?
Since Zulueta's obligation is measured in terms of U.S. dollars that have
increased in value vis-a-vis the peso, Art. 312, par. 1, of the Code of Commerce, which
was the law then in force, must be read into the contract. It provides:
"If the loan consists of money, the debtor shall pay it by returning an amount
equal to that received, in accordance with the legal value which the money may have
at the time of the return, unless the kind of money in which the payment is to be made
has been stipulated, in which case the change which its value may suffershall be to the
detriment or for the benefit of the lender." (Italics supplied)

The majority decision, in upholding the contention that Zulueta is not

chargeable with the 17% tax, virtually authorizes just the contrary; and permits the
defaulting borrower to repay an amount in pesos that, in violation of the law and his
engagement, can not be converted into the same amount of dollars loaned to him. I
believe it is contrary to all elemental justice and good faith to enable a borrower to
return to his creditor less than the amount borrowed, specially taking into account that
Zulueta, by his obdurate refusal to pay a just debt, is a debtor in bad faith who is
responsible for any subsequent damages suffered by his creditor, even if due to
fortuitous event.
Applicable here are the considerations in Hawes vs. Woolcock (26 Wis. 629,
635), quoted with approval in Engel vs. Mariano Velasco & Co., 47 Phil. 115, 143:
"In Hawes vs. Woolcock (26 Wis., 629, 635), the court said:
'Perhaps a strict application of logical reasoning to the question would lead to
the result that the premium should be estimated at the rate when the note fell due.
That was when the money should have been paid, and when the default in performing
the contract occurred. This conclusion would be supported by the analogy derived
from the rule of damages on contracts to deliver specific articles, fixing the market
price at the time when they ought to have been delivered as the criterion. This rule
might sometimes be to the advantage of the holder of the note, as in the present case.
In other cases, where the premium was less at the time the note became due than at
the time of trial, it would be to his detriment. And in view of these uncertainties and
fluctuations in the rate, upon grounds of policy as well as for its tendency to do as
complete justice between the parties as is possible, we have come to the conclusion
that the true rule in such cases is to give judgment for such an amount as will, at the
time of the judgment, purchase the amount due on the note in the funds or currency
in which it is payable'"

The crucial point is that the Bank's action is not for damages, but for specific
performance of Zulueta's obligation. While payable in Philippine pesos, it was actually
one to pay a definite sum in United States dollars, since he promised to pay an
equivalent amount. The failure to specify any fixed number of pesos, and the omission
of any reference to any rate of exchange, is proof that the parties had in mind the
restoration to the Bank of the value of the dollars it had advanced. In other words,
Zulueta engaged to return to the Bank so many Philippine pesos as could be converted
into $14,449.15; and that is what the Bank now asks him to do. It can not be justly
contended that if a debtor had borrowed, say, ten thousand dollars, the lender should
be satisfied with eight or nine thousand. Yet that is what the majority's decision
actually amounts to.
I see no point in determining the rate of dollar-peso exchange at the date of
maturity or of the constitution of the obligation, since Zulueta did not engage to pay
any definite amount of pesos, but so many as would be needed to make up
$14,449.15. And as Zulueta is being required to comply with a specific promise, there
is no relevancy in whether or not the main office of the Bank has or has not remitted
the dollars to its American agency; after all, the two are part of the same institution.
Anyway, if the dollars have not been remitted, the amount that Zulueta is now
sentenced to pay will not permit a remittance of the same number of dollars that the
Bank advanced for his account. If they were heretofore remitted, the funds of the Bank
in Manila have been diminished pro tanto, and they can not be replenished to their
original level in terms of dollars unless Zulueta is required to pay the exchange tax.
Of course, the majority opinion has the merit of giving the Bank a costly lesson
on the advantages of not considering political influence in the making and collecting of
its loans; but I am afraid the experience will be too quickly forgotten to even palliate
the sacrifice of fundamental justice to technical considerations.
For the foregoing reasons, I dissent.
Labrador, Concepcion and Endencia, JJ., concur.
||| (Philippine National Bank v. Zulueta, G.R. No. L-7271, [August 30, 1957], 101 PHIL
1071-1084)

THIRD DIVISION
[G.R. No. 170325. September 26, 2008.]
PHILIPPINE NATIONAL BANK, petitioner, vs. ERLANDO T. RODRIGUEZ and
NORMA RODRIGUEZ, respondents.
DECISION
REYES, R.T., J p:
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? TEDaAc
These questions seek answers in this petition for review on certiorari of 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, Cebu City. They maintained
savings and demand/checking accounts, namely, PNBig Demand Deposits
(Checking/Current Account No. 810624-6 under the account name Erlando and/or
Norma 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 of PNB employees. Naturally, PEMSLA was likewise a client of PNB Amelia 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 PEMSLA's policy not to approve applications for loans of members with
outstanding debts. To subvert this 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 account without any indorsement from the named payees. This was an
irregular procedure made possible through the facilitation of Edmundo Palermo, Jr.,
treasurer of PEMSLA and bank teller in the PNB Branch. It appears that this became
the usual practice for the parties. aDICET
For the period November 1998 to February 1999, the spouses issued sixty nine
(69) checks, in the total amount of P2,345,804.00. These were payable to forty seven
(47) individual payees who were all members of PEMSLA. 4
Petitioner PNB eventually found out about these fraudulent acts. To put a stop
to this scheme, PNB closed 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 the PEMSLA 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 to
P2,345,804.00. The spouses contended that because PNB credited the checks to the
PEMSLA account even without indorsements, PNB violated its contractual obligation
to them as depositors. PNB paid the wrong payees, hence, it should bear the loss.
PNB moved to dismiss the complaint on the ground of lack of cause of action.
PNB argued 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 dated January 12, 2000, the RTC denied PNB's motion to dismiss.
In its Answer, 5 PNB claimed 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, actually did not intend for
the named payees to receive the proceeds of the checks. Consequently, the payees
were considered as "fictitious payees" as defined under the Negotiable Instruments
Law (NIL). Being checks made to fictitious payees which are bearer instruments, the
checks were negotiable by mere delivery. PNB's Answer included its 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 reimburse PNB
the amount it shall pay. STIcaE
After trial, the RTC rendered judgment in favor of spouses Rodriguez (plaintiffs).
It ruled that PNB (defendant) is liable to return the value of the checks. All
counterclaims and cross-claims were dismissed. The dispositive portion of the RTC
decision 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 of P2,345,804.00
or reinstate or restore the amount of P775,337.00 in the PNBig Demand
Deposit Checking/Current Account No. 810480-4 of Erlando T. Rodriguez, and
 the amount of P1,570,467.00 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 defendant PNB is 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 of P4,000,000.00,
as a result of their having incurred great difficulty (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 of P1,000,000.00;
(c) Exemplary damages in the amount of P500,000.00;
(d) Attorney's fees in the amount of P150,000.00 considering that this case
does not involve very complicated issues; and for the
(e) Costs of suit. ECcaDT
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 dated July 22, 2004, the CA reversed and set aside the RTC disposition. The CA concluded
that the checks were obviously meant by the spouses to be really paid to PEMSLA. The court a quo declared:
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
PEMSLA's business arrangement — that the value of the rediscounted checks of the
plaintiffs-appellees would be deposited in PEMSLA's account for payment of the loans
it has approved in exchange for PEMSLA's 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 PEMSLA's errand boy for presentment to the defendant-
appellant that led to this present controversy. It also appears that the teller who
accepted the said checks was PEMSLA's 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.
ACTEHI

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 PEMSLA's 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. . . . . 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 that PNB
committed 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 against PNB to recover the value of the checks.
On October 11, 2005, the CA reversed itself via an Amended Decision, the last
paragraph and fallo of which read:
In sum, we rule that the defendant-appellant PNB is liable to the plaintiffs-appellees
Sps. Rodriguez for the following: CIaHDc
1. Actual damages in the amount of P2,345,804 with interest at 6% per annum
from 14 May 1999 until fully paid;
2. Moral damages in the amount of P200,000;
3. Attorney's fees in the amount of P100,000; 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, PNB failed 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, PNB is 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 to treat 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?
PNB argues 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 validly negotiated 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 proprio or upon motion of the
parties, correct its judgment with the singular objective of achieving justice for the
litigants. 10 AcISTE
However, a word of caution to lower courts, the CA in Cebu in 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 of every 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 CAHTIS
(b) When it is payable to a person named therein or bearer; or
(c) When 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; 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)

The distinction between 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 to "Prinsipe Abante" or "Si 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 the
United States are a logical starting point since our law on negotiable instruments was
directly lifted from the Uniform Negotiable Instruments Law of the United 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. aTcESI
In a fictitious-payee situation, the drawee bank is absolved from liability and the
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 in Mueller & 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 of the checks, the
claim was denied.

The US Supreme Court held in Mueller that 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 recent Getty 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 commercial bad faith on the part of the drawee bank, or any
transferee of 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
the US Supreme Court in Getty: HEISca
Consequently, a transferee's 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 . . . . 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. . . . Such 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". . . . 19 (Emphasis added)

Getty also 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, PNB must show that
the makers did not intend for the named payees to be part of the transaction involving
the checks. At most, the bank's 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 are presumed order instruments. This is because, as
found by both lower courts, PNB failed to present sufficient evidence to defeat the
claim of respondents-spouses that the named payees were the intended recipients of
the 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. cTCADI
Because of a failureto show that the payees were "fictitious" in its broader
sense, the fictitious-payee rule does not apply. Thus, the checks are to be deemed
payable to order. Consequently, the drawee bank bears the loss. 20
PNB was 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 customer's 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 in accordance
with the drawer's instructions, i.e., to the named payee in the check. It should charge
to the drawer's accounts only the payables authorized by the latter. Otherwise, the
drawee will be violating the instructions of the drawer and it shall be liable for the
amount charged to the drawer's account. 24
In the case at bar, respondents-spouses were the bank's 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 of
the signatures on the checks before accepting them for deposit. Lastly, PNB was
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 to PNB for 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, PNB was 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. In Bank of the Philippine Islands v. Court of Appeals, 25
this Court cautioned thus: cCaIET

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 greater than 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

PNB's 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

PNB's 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, PNB was duty-bound by law and by banking
rules and procedure to require that the checks be properly indorsed before accepting
them for deposit and payment. In fine, PNB should be held liable for the amounts of
the checks.
One Last Note
We note that the RTC failed to thresh out the merits of PNB's 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 of PNB. The Rules expressly provide that failure to file an answer is a
ground for a declaration that defendant is in default. 28 Yet, the RTC failed to sanction the failure of
both PEMSLA and MPC to file responsive pleadings. Verily, the RTC dismissal of PNB's 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.

To PNB's 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 to P50,000.00. 29
WHEREFORE, the appealed Amended Decision is AFFIRMED with the
MODIFICATION that the award for moral damages is reduced to P50,000.00, and that
this is without prejudice to whatever civil, criminal, or administrative action PNB might
take against PEMSLA, MPC, and the employees involved. ASDCaI
SO ORDERED.
Ynares-Santiago, Austria-Martinez, Chico-Nazario and Nachura, JJ., concur.

EN BANC
[G.R. No. L-2516. September 25, 1950.]
ANG TEK LIAN, petitioner, vs. THE COURT OF APPEALS, respondent.
Laurel, Sabido, Almario & Laurel, for petitioner.
Solicitor General Felix Bautista Angelo and Solicitor Manuel Tomacruz, for
respondent.
SYLLABUS
 1. CRIMINAL LAW; ESTAFA"; ISSUING CHECK WITH INSUFFICIENT BANK DEPOSIT
TO COVER THE SAME. — One who issues a check payable to cash to accomplish deceit
and knows that at the time had no sufficient deposit with the bank to cover the
amount of the check and without informing the payee of such circumstances, is guilty
of estafa as provided by article 315, paragraph (d), subsection 2 of the Revised Penal
Code.
2. NEGOTIABLE INSTRUMENTS; CHECK DRAWN PAYABLE TO THE ORDER OF
"CASH"; INDORSEMENT. — A check payable to the order of "cash to the person
presenting it for payment without the drawer's indorsement.
DECISION
BENGZON, J p:
For having issued a rubber check, Ang Tek Lian was convicted of estafa in the
Court of First Instance of Manila. The Court of Appeals affirmed the verdict.
It appears that, knowing he had no funds therefor, Ang Tek Lian drew on
Saturday, November 16, 1946, the check Exhibit A upon the China Banking Corporation
for the sum of P4,000, payable to the order of "cash". He delivered it to Lee Hua Hong
in exchange for money which the latter handed in the act. On November 18, 1946, the
next business day, the check was presented by Lee Hua Hong to the drawee bank for
payment, but it was dishonored for insufficiency of funds, the balance of the deposit of
Ang Tek Lian on both dates being P335 only.
The Court of Appeals believed the version of Lee Huan Hong who testified that
"on November 16, 1946, appellant went to his (complainant's) office, at 1217 Herran,
Paco, Manila, and asked him to exchange Exhibit A — which he (appellant) then
brought with him — with cash alleging that he needed badly the sum of P4,000
represented by the check, but could not withdraw it from the bank, it being then
already closed; that in view of this request and relying upon appellant's assurance that
he had sufficient funds in the bank to meet Exhibit A, and because they used to borrow
money from each other, even before the war, and appellant owns a hotel and
restaurant known as the North Bay Hotel, said complainant delivered to him, on the
same date, the sum of P4,000 in cash; that despite repeated efforts to notify him that
the check had been dishonored by the bank, appellant could not be located any-
where, until he was summoned in the City Fiscal's Office in view of the complaint for
estafa filed in connection therewith; and that appellant has not paid as yet the amount
of the check, or any part thereof."
 Inasmuch as the findings of fact of the Court of Appeals are final, the only
question of law for decision is whether under the facts found, estafa had been
accomplished.
Article 315, paragraph (d), subsection 2 of the Revised Penal Code, punishes
swindling committed "By post-dating a check, or issuing such check in payment of an
obligation the offender knowing that at the time he had no funds in the bank, or the
funds deposited by him in the bank were not sufficient to cover the amount of the
check, and without informing the payee of such circumstances"
We believe that under this provision of law Ang Tek Lian was properly held
liable. In this connection, it must be stated that, as explained in People vs. Fernandez
(59 Phil., 615), estafa is committed by issuing either a postdated check or an ordinary
check to accomplish the deceit.
It is argued, however, that as the check had been made payable to "cash" and
had not been endorsed by Ang Tek Lian, the defendant is not guilty of the offense
charged. Based on the proposition that "by uniform practice of all banks in the
Philippines a check so drawn is invariably dishonored," the following line of reasoning
is advanced in support of the argument:
". . . When, therefore, he (the offended party) accepted the check (Exhibit A)
from the appellant, he did so with full knowledge that it would be dishonored upon
presentment. In that sense, the appellant could not be said to have acted fraudulently
because the complainant, in so accepting the check as it was drawn, must be
considered, by every rational consideration, to have done so fully aware of the risk he
was running thereby." (Brief for the appellant, p. 11.)

We are not aware of the uniformity of such practice. Instances have

undoubtedly occurred wherein the Bank required the indorsement of the drawer
before honoring a check payable to "cash." But cases there are too, where no such
requirement had been made. It depends upon the circumstances of each transaction.
Under the Negotiable Instruments Law (sec. 9 [d], a check drawn payable to the
order of "cash" is a check payable to bearer, and the bank may pay it to the person
presenting it for payment without the drawer's indorsement.
"A check payable to the order of cash is a bearer instrument. Bacal vs. National
City Bank of New York (1933), 146 Misc., 732; 262 N. Y. S., 839; Cleary vs. Da Beck Plate
Glass Co. (1907), 54 Misc., 537; 104 N. Y. S., 831; Massachusetts Bonding & Insurance
Co. vs. Pittsburgh Pipe & Supply Co. (Tex. Civ. App., 1939), 135 S. W. (2d), 818. See also
H. Cook & Son vs. Moody (1916), 17 Ga. App., 465; 87 S. E., 713."
 "Where a check is made payable to the order of 'cash', the word cash 'does not
purport to be the name of any person', and hence the instrument is payable to bearer.
The drawee bank need not obtain any indorsement of the check, but may pay it to the
person presenting it without any indorsement. . . ." (Zollmann, Banks and Banking,
Permanent Edition, Vol. 6, p. 494.)

Of course, if the bank is not sure of the bearer's identity or financial solvency, it
has the right to demand identification and/or assurance against possible
complications, — for instance, (a) forgery of drawer's signature, (b) loss of the check by
the rightful owner, (c) raising of the amount payable, etc. The bank may therefore
require, for its protection, that the indorsement of the drawer — or of some other
person known to it — be obtained. But where the Bank is satisfied of the identity
and/or the economic standing of the bearer who tenders the check for collection, it
will pay the instrument without further question; and it would incur no liability to the
drawer in thus acting.
"A check payable to bearer is authority for payment to the holder. Where a
check is in the ordinary form, and is payable to bearer, so that no indorsement is
required, a bank, to which it is presented for payment, need not have the holder
identified, and is not negligent in failing to do so. . . ." (Michie on Banks and Banking,
Permanent Edition, Vol. 5, p. 343.)
". . . Consequently, a drawee bank to which a bearer check is presented for
payment need not necessarily have the holder identified and ordinarily may not be
charged with negligence in failing to do so. See Opinions 6C:2 and 6C:3. If the bank has
no reasonable cause for suspecting any irregularity, it will be protected in paying a
bearer check, 'no matter what facts unknown to it may have occurred prior to the
presentment.' 1 Morse, Banks and Banking, sec. 393.
"Although a bank is entitled to pay the amount of a bearer check without
further inquiry, it is entirely reasonable for the bank to insist that the holder give
satisfactory proof of his identity . . .." (Paton's Digest, Vol. I, p. 1089.)

Anyway, it is significant, and conclusive, that the form of the check Exhibit A was
totally unconnected with its dishonor. The Court of Appeals declared that it was
returned unsatisfied because the drawer had insufficient funds — not because the
drawer's indorsement was lacking.
Wherefore, there being no question as to the correctness of the penalty
imposed on the appellant, the writ of certiorari is denied and the decision of the Court
of Appeals is hereby affirmed, with costs.
Moran, C.J., Ozaeta, Paras, Pablo, Tuason, and Reyes, JJ., concur.
 (Ang Tek Lian v. Court of Appeals, G.R. No. L-2516, [September 25, 1950], 87
|||

PHIL 383-387)
 FIRST DIVISION
[G.R. No. L-18103. June 8, 1922.]
PHILIPPINE NATIONAL BANK, plaintiff-appellee, vs. MANILA OIL REFINING &
BY-PRODUCTS COMPANY, INC., defendant-appellant.
Antonio Gonzalez for appellant.
Roman J. Lacson for appellee.
Hartigan & Welch; Fisher & DeWitt; Perkins & Kincaid; Gibbs, McDonough &
Johnson; Julian Wolfson; Ross & Lawrence; Francis B. Mahoney, and Jose A. Espiritu,
amici curiae.
SYLLABUS
1. JUDGMENTS; JUDGMENTS BY CONFESSION; ORIGIN. — The practice of
entering judgments in debt on warrants of attorney is ancient origin.
2. ID.; ID.; COMMON LAW PRACTICE. — In the course of time a warrant of
attorney to confess judgment became a familiar common law security.
3. ID.; ID.; KINDS. — At common law, there were two kinds of judgments by
confession; the one a judgment by cognovit actionem, and the other by confession
relicta verificatione.
4. ID.; ID.; ADVANTAGES. — Judgments by confession as appeared at common
law were considered an amicable, easy, and cheap way settle and secure debts.
5. ID.; ID.; DISADVANTAGES. — The recognition of such a form of obligation
would bring about a complete reorganization of commercial customs and practices,
with reference to short-term obligations. Instead of resulting to the advantage of
commercial life in the Philippines, judgment notes might be the source of abuse and
oppression, and make the involuntary parties thereto.
6. ID.; ID.; VALIDITY OF; IN THE UNITED STATES. — A number of jurisdictions in
the United States have accepted the common law view of judgment by confession,
while still other jurisdictions have refused to sanction them.
7. ID.; ID.; ID.; ID. — In the absence of statute, there is a conflict of authority as
to the validity of a warrant of attorney for the confession of judgment. The weight of
opinion is that unless authorized by statute, warrants of attorney to confess judgment
are void, as against public policy.
8. ID.; ID.; ID.; IN THE PHILIPPINE ISLANDS; STATUTORY PROVISIONS. — Neither
the Code of Civil Procedure nor any other remedial statute expressly or tacitly
recognizes a confession of judgment commonly called a judgment note.
9. ID.; ID.; ID.; ID.; ID.; RIGHT TO A DAY IN COURT. — The provisions of the Code
of Civil Procedure, in relation to constitutional safeguards relating to the right to take a
man's property only after a day in court and after due process of law, contemplate that
all defendants shall have opportunity to be heard.
10. ID.; ID.; ID.; ID.; ID.; COUNTERCLAIMS. — The provisions of the Code of Civil
Procedure pertaining to counterclaims argue against judgment notes, especially as the
Code provides that in case the defendant or his assignee omits to set up a
counterclaim, he cannot afterwards maintain an action against the plaintiff therefor.
11. ID.; ID.; ID.; ID.; ID.; ARTICLE 1256, CIVIL CODE. — At least one provision of
the substantive law, namely, that the validity and fulfillment of contracts cannot be left
to the will of one of the contracting parties (Civil Code, art. 1256), constitutes another
indication of fundamental legal purpose.
12. ID.; ID.; ID.; ID.; ID.; NEGOTIABLE INSTRUMENTS LAW (ACT No. 2031),
SECTION 5 (b) OF negotiable Instrument otherwise negotiable is not affected by a
provision which authorizes a confession of judgment if the instrument be not paid at
maturity, cannot be taken to sanction judgments by confession.
13. ID.; ID.; ID.; ID. — Warrants of attorney to confess judgment are void as
against public policy, because they enlarge the field for fraud, because under these
instruments the promissor bargains away his right to a day in court, and because the
effect of the instrument is to strike down the right of appeal accorded by statute.
14. ID.; ID.; ID.; ID. — Warrants of attorney to confess judgment are not
authorized nor contemplated by our law.
15. BILLS AND NOTES; JUDGMENT NOTE, VALIDITY OF. — In the absence of
express legislative sanction, provisions in notes authorizing attorneys to appear and
confess judgments against makers should not be recognized in this jurisdiction by
implication.
16. ID.; ID. — A provision in a promissory note whereby in case the same is not
paid at maturity, the maker authorizes any attorney to appear and confess judgment
 thereon for the principal amount, with interest, costs, and attorney's fees, and waives
all errors, rights to inquisition, and appeal, and all property exemptions, is not valid in
this jurisdiction.
DECISION
MALCOLM, J p:
The question of first impression raised in this case concerns the validity in this
jurisdiction of a provision in a promissory note whereby in case the same is not paid at
maturity, the maker authorizes any attorney to appear and confess judgment thereon
for the principal amount, with interest, costs, and attorney's fees, and waives all errors,
rights to inquisition, and appeal, and all property exemptions.
On May 8, 1920, the manager and the treasurer of the Manila Oil Refining & By-
Products Company, Inc,. executed and delivered to the Philippine National Bank, a
written instrument reading as follows:
"RENEWAL.
"P61,000.00
"MANILA, P.I., May 8, 1920.
"On demand after date we promise to pay to the order of the Philippine
National Bank sixty-one thousand only pesos at Philippine National Bank, Manila, P.I.
"Without defalcation, value received; and do hereby authorize any attorney in
the Philippine Islands, in case this note be not paid at maturity, to appear in my name
and confess judgment for the above sum with interest, cost of suit and attorney's fees
of ten (10) per cent for collection, a release of all errors and waiver of all rights to
inquisition and appeal, and to the benefit of all laws exempting property, real or
personal, from levy or sale. Value received. No. —— Due ——
"MANILA OIL REFINING & BY-PRODUCTS CO., INC.,
(Sgd.) "VICENTE SOTELO,
"Manager.
"MANILA OIL REFINING & BY-PRODUCTS CO., INC.,
(Sgd.) "RAFAEL LOPEZ.
"Treasurer."
 The Manila Oil Refining & By-Products Company, Inc. failed to pay the
promissory note on demand. The Philippine National Bank brought action in the Court
of First Instance of Manila, to recover P61,000, the amount of the note, together with
interest and costs. Mr. Elias N. Recto, an attorney associated with the Philippine
National Bank, entered his appearance in representation of the defendant, and filed a
motion confessing judgment. The defendant, however, in a sworn declaration,
objected strongly to the unsolicited representation of attorney Rect. Later, attorney
Antonio Gonzalez appeared for the defendant and filed a demurrer, and when this was
overruled, presented an answer. The trial judge rendered judgment on the motion of
attorney Recto in the terms of the complaint.
The foregoing facts, and appellant's three assignments of error, raise squarely
the question which was suggested in the beginning of this opinion. In view of the
importance of the subject to the business community, the advice of prominent
attorneys-at-law with banking connections, was solicited. These members of the bar
responded promptly to the request of the court, and their memoranda have proved
highly useful in the solution of the question. It is to the credit of the bar that although
the sanction of judgment notes in the Philippines might prove of immediate value to
clients, every one of the attorneys has looked upon the matter in a big way, with the
result that out of their independent investigations has come a practically unanimous
protest against the recognition in this jurisdiction of judgment notes. 1
Neither the Code of Civil Procedure nor any other remedial statute expressly or
tacitly recognizes a confession of judgment commonly called a judgment note. On the
contrary, the provisions of the Code of Civil Procedure, in a relation to constitutional
safeguards relating to the right to take a man's property only after a day in court and
after due process of law, contemplate that all defendants shall have an opportunity to
be heard. Further, the provisions of the Code of Civil Procedure pertaining to
counterclaims argue against judgment notes, especially as the Code provides that in
case the defendant or his assignee omits to set up a counterclaim, he cannot
afterwards maintain an action against the plaintiff therefor. (Secs. 95, 96, 97.) At least
one provision of the substantive law, namely, that the validity and fulfillment of
contracts cannot be left to the will of one of the contracting parties (Civil Code, art.
1256), constitutes another indication of fundamental legal purpose.
The attorney for the appellee contends that the Negotiable Instruments Law
(Act No. 2031) expressly recognized judgment notes, and that they are enforcible
under the regular procedure. The Negotiable Instruments Law, in section 5, provides
that "The negotiable character of an instrument otherwise negotiable is not affected
by a provision which ". . . (b) Authorizes confession of judgment if the instrument be
not paid at maturity.' We do not believe, however, that this provision of law can be
taken to sanction judgments by confession, because it is a portion of a uniform law
which merely provides that, in jurisdictions where judgments notes are recognized,
such clauses shall not affect the negotiable character of the instrument. Moreover, the
same section of the Negotiable Instruments Law concludes with these words: "But
nothing in this section shall validate any provision or stipulation otherwise illegal."
The court is thus put in the position of having to determine the validity in the
absence of statute of a provision in a note authorizing an attorney to appear and
confess judgment against the maker. This situation, in reality, has its advantages for it
permits us to reach that solution which is best grounded in the solid principles of the
law, and which will best advance the public interest.
The practice of entering judgments in debt on warrants of attorney is of ancient
origin. In the course of time a warrant of attorney to confess judgment became a
familiar common law security. At common law, there were two kinds of judgments by
confession; the one a judgment by cognovit actionem, and the other by confession
relicta verificatione. A number of jurisdictions in the United States have accepted the
common law view of judgments by confession, while still other jurisdictions have
refused to sanction them. In some States, statutes have been passed which have either
expressly authorized confession of judgment on warrant of attorney, without
antecedent process, or have forbidden judgments of this character. In the absence of
statute, there is a conflict of authority as to the validity of a warrant of attorney for the
confession of judgment. The weight of opinion is that, unless authorized by statute,
warrants of attorney to confess judgment are void, as against public policy.

Possibly the leading case on the subject is First National Bank of Kansas City vs.
White [(1909], 220 Mo., 717; 16 Ann. Cas., 889; 120 S. W., 36; 132 Am. St. Rep., 612).
The record in this case discloses that on October 4, 1900, the defendant executed and
delivered to the plaintiff an obligation in which the defendant authorized any attorney-
at-law to appear for him in an action on the note at any time after the note became
due in any court of record in the State of Missouri, or elsewhere, to waive the issuing
and service of process, and to confess judgment in favor of the First National Bank of
Kansas City for the amount that might then be due thereon, with interest at the rate
therein mentioned and the costs of suit, together with an attorney's fee of 10 per cent
and also to waive and release all errors in said proceedings and judgment, and all
proceedings, appeals, or writs of error thereon. Plaintiff filed a petition in the Circuit
Court to which was attached the above-mentioned instrument. An attorney named
Denham appeared pursuant to the authority given by the note sued on, entered the
appearance of the defendant, and consented that judgment be rendered in favor of
the plaintiff as prayed in the petition. After the Circuit Court had entered a judgment,
the defendant, through counsel, appeared specially and filed a motion to set it aside.
The Supreme Court of Missouri, speaking through Mr. Justice Graves, in part said:
"But going beyond the mere technical question in our preceding paragraph
discussed, we come to a question urged which goes to the very root of this case, and
whilst new and novel in this state, we do not fell that the cause should be disposed of
without discussing and passing upon that question.
xxx xxx xxx
"And if this instrument be considered as a security for a debt, as it was by the
common law, it has never so found recognition in this state. The policy of our law has
been against such hidden securities for debt. Our Recorder's Act is such that
instruments intended as security for debt should find a place in the public records, and
if not, they have often been viewed with suspicion, and their bona fides often
questioned.
"Nor do we think that the policy of our law is such as to thus place a debtor in
the absolute power of his creditor. The field for fraud is too far enlarged by such an
instrument. Oppression and tyranny would follow the footsteps of such a diversion in
the way of security for debt. Such instruments procured by duress could shortly be
placed in judgment in a foreign court and much distress result therefrom.
"Again, under the law the right to appeal to this court or some other appellate
court is granted to all persons against whom an adverse judgment is rendered, and this
statutory right is by the instrument stricken down. True it is that such right is not
claimed in this case, but it is a part of the bond and we hardly know why this pound of
flesh has not been demanded. Courts guard with jealous eye any contract innovations
upon their jurisdiction. The instrument before us, considered in the light of a contract,
actually reduces the courts to mere clerks to enter and record the judgment called for
therein. By our statute (Rev. St. 1899, sec. 645) a party to a written instrument of this
character has the right to show a failure of consideration, but this right is brushed to
the wind by this instrument and the jurisdiction of the court to hear that controversy is
by the contract divested. In 9 Cyc., 510, it is said: 'Agreements whose object is to oust
the jurisdiction of the courts are contrary to public policy and will not be enforced.
Thus it is held that any stipulation between parties to a contract distinguishing
between the different courts of the country is contrary to public policy. The principle
has also been applied to a stipulation in a contract that a party who breaks it may not
be sued, to an agreement designating a person to be sued for its breach who is nowise
 liable and prohibiting action against any but him, to a provision in a lease that the
landlord shall have the right to take immediate judgment against the tenant in case of
a default on his part, without giving the notice and demand for possession and filing
the complaint required by stature, to a by-law of a benefit association that the
decisions of its officers on a claim shall be final and conclusive, and to many other
agreements of a similar tendency. In some courts, any agreement as to the time for
suing different from the time allowed by the statute of limitations within which suit
shall be brought or the right to sue be barred is held void.'
xxx xxx xxx
"We shall not pursue this question further. This contract, in so far as it goes
beyond the usual provisions of a note, is void as against the public policy of the state,
as such public policy is found expressed in our laws and decisions. Such agreements
are iniquitous to the uttermost and should be promptly condemned by the courts,
until such time as they may receive express statutory recognition, as they have in some
states.
xxx xxx xxx
"From what has been said, it follows that the Circuit Court never had
jurisdiction of the defendant, and the judgment is reversed."

The case of Farquhar & Co. vs. Dehaven ([1912], 70 W. Va., 738; 40 L. R. A. [N.
S.], 956; 75 S. E., 65; Ann. Cas. [1914--A], is another well-considered authority. The
notes referred to in the record contained waiver of presentment and protest,
homestead and exemption rights real and personal, and other rights, and also the
following material provision: " 'And we do hereby empower and authorize the said A.
B. Farquhar Co. Limited, or agent, or any prothonotary or attorney of any Court of
Record to appear for us and in our name to confess judgment against us and in favor of
said A. B. Farquhar Co., Limited, for the above named sum with costs of suit and
release of all errors and without stay of execution after the maturity of this note." 'The
Supreme Court of West Virginia, on consideration of validity of the judgment note
above described, speaking through Mr. Justice Miller, in part said:
"As both sides agree the question presented is one of first impression in this
State. We have no Statute, as has Pennsylvania and many other states, regulating the
subject. In the decision we are called upon to render, we must law, in force here, and
to our statute law, applicable, and to such judicial decisions and practices in Virginia, in
force at the time of the separation, as are properly binding on us. It is pertinent to
remark in this connection, that after nearly fifty years of judicial history in this State no
case has been brought here involving this question, strong evidence, we think, that
such notes, if at all, have never been in very general use in this commonwealth. And in
 most states where they are current the use of them has grown up under statutes
authorizing them, and regulating the practice of employing them in commercial
transactions.
xxx xxx xxx
"It is contended, however, that the old legal maxim, qui facit per alium, facit
per se, is as applicable here as in other cases. We do not think so. Strong reasons exist,
as we have shown, for denying its application, when holders of contracts of this
character seek the aid of the courts and of their execution process them, defendant
having had no day in court or opportunity to be heard. We need not say in this case
that a debtor may not, by proper power of attorney duly executed, authorize another
to appear in court, and by proper endorsement upon the writ waive service of process,
and confess judgment. But we do not wish to be understood as approving or intending
to countenance the practice of employing in this state commercial paper of the
character here involved. Such paper has heretofore had little if any currency here. If
the practice is adopted into this state it ought to be, we think, by act of the Legislature,
with all proper safeguards thrown around it, to prevent fraud and imposition. The
policy of our law is, that no man shall suffer judgment at the hands of our courts
without proper process and a day to be heard. To give currency to such paper by
judicial pronouncement would be to open the door to fraud and imposition, and
subject the people to wrongs and injuries not heretofore contemplated. This we are
unwilling to do."

A case typical of those authorities which lend support to judgment notes is First
National Bank of Las Cruces vs. Baker ([1919], 180 Pac., 291). The Supreme Court of
New Mexico, in a per curiam decision, in part, said:
"In some of the states the judgments upon warrants of attorney are
condemned as being against public policy. (Farquhar & Co. vs. Dehaven, 70 W. Va., 738;
75 S. E., 65; 40 L. R. A. [N. S.], 956; Ann. Cas. [1914 A], 640, and First National Bank of
Kansas City vs. White, 220 Mo., 717; 120 S. W., 35; 132 Am. St. Rep., 612; 16 Ann. Cas.,
889, are examples of such holding.) By just what course of reasoning it can be said by
the courts that such judgments are against public policy we are unable to understand.
It was a practice from time immemorial at common law, and the common law comes
down to us sanctioned as justified by the reason and experience of English-speaking
people. If conditions have arisen in this country which make the application of the
common law undesirable, it is for the Legislature to so announce, and to prohibit the
taking of judgments of this kind. Until the Legislature has spoken along that line, we
know of no theory upon which such judgments can be declared as against the public
policy of the state. We are aware that the argument against them is that they enable
the unconscionable credit to take advantage of the necessities of the poor debtor and
 cut him off from his ordinary day in court. On the other hand, it may be said in their
favor that it frequently enables a debtor to obtain money which he could by no
possibility otherwise obtain. It strengthens his credit, and may be most highly
beneficial to him at times. In some of the states these judgments have been
condemned by statute and of course in that case are not allowed.
"Our conclusion in this case is that a warrant of attorney given as security to a
creditor accompanying a promissory note confers a valid power, and authorizes a
confession of judgments in any court of competent jurisdiction in an action to be
brought upon said note; that our cognovit statute does not cover the same field as
that occupied by the common-law practice of taking judgments upon warrant of
attorney, and does not impliedly or otherwise abrogate such practice; and that the
practice of taking judgments upon warrant of attorney, and does not impliedly or
otherwise abrogate such practice; and that the practice of taking judgments upon
warrants of attorney as it was pursued in this case is not against any public policy of
the state, as declared by its laws."

With reference to the conclusiveness of the decision here mentioned, it may be

said that they are based on the practice of the English-American common law, and that
the doctrines of the common law are binding upon Philippine courts only in so far as
they are founded on sound principles applicable to local conditions.
Judgments by confession as appeared at common law were considered an
amicable, easy, and cheap way to settle and secure debts. They are quick remedy serve
to save the court's time. Time also save time and money of the litigants and the
government the expenses that a long litigation entails. In one sense, instruments of
this character may be considered as special agreements, with power to enter up
judgments on them, binding the parties to the result as they themselves viewed it.
On the other hand, are disadvantages to the commercial world which outweigh
the considerations just mentioned. Such warrants of attorney are void as against public
policy, because they enlarge the field for fraud, because under these instruments the
promissor bargains away his right to a day in court, and because the effect of the
instrument is to strike down the right of appeal accorded by statute. The recognition of
such form of obligation would bring about a complete reorganization of commercial
customs and practices, with reference to short-term obligations. It can readily be seen
that judgment notes, instead of resulting to the advantage of commercial life the
Philippines might be the source of abuse and oppression, and make the courts
involuntary parties thereto. If the bank has a meritorious case, the judgment is
ultimately certain in the courts.
 We are of the opinion that warrants of attorney to confess judgment are not
authorized nor contemplated by our law. We are further of the opinion that provisions
in notes authorizing attorneys to appear and confess judgments against makers should
not be recognized in this jurisdiction by implication and should only be considered as
valid when given express legislative sanction.
The judgment appealed from is set aside, and the case is remanded to the lower
court for further proceedings in accordance with this decision. Without special finding
as to costs in this instance, it is so ordered.
Araullo, C.J., Avanceña, Villamor, Ostrand, Johns, and Romualdez, JJ., concur.
Footnotes
1.MEMORANDA OF "AMICI CURLAE"
Attorney Thos. L. Hartigan, of Hartigan & Welch, states:
"Though we are attorneys for two of the large banks here and keenly interested in the
introduction of any improvements that would make for simplification of procedure and
rapidity of practice, we cannot favor the introduction of confessions of judgment in the
Philippine Islands. In our opinion, it would open the doors to fraud to an extent that would
more than counterbalance any advantages of its use.
"With our lack of system in recording judgments and with the practice of keeping merchants'
books in various foreign languages, there would be ample opportunity for debtor to make
preferences by confessions of judgment which could not be discovered by the creditors
until too late and which would be nearly impossible to set aside even when discovered in
time.
"Although, as representatives of the banks, we are representing the creditor class, we believe the
introduction of confessions of judgment would ultimately cause much more loss than
benefit to that class.
Attorney Clyde A. DeWitt, of Fisher & DeWitt, states:
"There is no statutory sanction in this jurisdiction for such provisions in negotiable instruments.
Section 5 (b) of the Negotiable Instruments Law does not constitute such sanction because
(1) it merely provides that such clauses will not affect the negotiable character of the
instrument, and (2) it concludes with language showing that the Legislature did not intend
thereby to validate any provision otherwise unlawful. The language is: 'But nothing in this
section shall validate any provision or stipulation otherwise illegal.'
"The question then is whether or not, in the absence of express legislative sanction, such
warrants of attorney are valid. There are not many American cases in which this precise
 question has been considered, and in those cases in which the question has been raised,
the reasoning of the courts has been colored by the fact that the commercial use of these
warrants of attorney as security for debt was sanctioned at common law, and the
procedural statutes are held to be merely cumulative and not in derogation of the
common-law remedies. We, of course, have no such situation here.
"The cases are collected in a note to First National Bank vs. White (220 Mo., 717), found in 16
Ann. Cas, 893, and it is there shown that in Missouri and Kansas such provisions are held to
void as against the public policy of the State as expressed in its laws and the decisions of its
courts, while in Colorado and Illinois their validity was upheld as a familiar common-law
security not affected by the procedural statutes. Yet it is there pointed out that in Kahn vs.
Lesser (97 Wis., 217, 72 N. W., 739), the court in referring to a judgment by confession
under warrant of attorney in a promissory note, said:
"The judgment in this case must stand, if at all, by the authority of the statute. The proceeding by
which it was entered was outside and in derogation of the common-law practice of court;
and the statute, as well as the proceedings under it, must be strictly construed.'
"In Iowa, in an early case, McClish vs Manning (3 Green, 223), the validity of these warrant of
attorney was upheld, referring to a statute authorizing any person to confess a judgment,
by himself or his attorney. In a later decision, Hamilton vs. Schoenberger (47 Iowa, 385), it
was expressly held that such a provision in a note could not be enforced in the courts of
that State, and was not authorized or contemplated by its laws. And in Tolman vs. Jansen
(106 Iowa, 455,), it was held that such a provision, being void, would not effect the
negotiability of a note, even though its effect would be to make uncertain the time of
payment.
"The reasoning in First National Bank vs. White, supra, is persuasive. The court there held that
these warrants of attorney are void as against the public policy of the state on the ground,
first that their effect is to enlarge the field for fraud; second, that under such an instrument
the promissor bargains away his right to his day in court; third, that the effect of the
instrument is to strike down the right to appeal accorded by statute, and, fourth, that there
was no provision for the public recording of such an instrument if regarded as a security for
a debt.
"It seems to me that on the precise grounds stated in the White case, these warrants of attorney
should be held void as against public policy in this jurisdiction. If given effect, they bargain
away the jurisdiction of the courts to try and determine the liability of the maker of the
note on its merits. To uphold them would be to facilitate the operations of usurers, the
collection of gambling debts, and would make difficult, if not impossible under our
procedure, the setting aside of judgments entered in virtue thereof where the execution of
the instrument was obtained by fraud, duress, or where there had been an entire failure of
consideration. I can think of no advantage which would result to the commercial world
 from upholding these warrants of attorney which would outweigh the foregoing
considerations."
Attorney E. Arthur Perkins & Kincaid, states:
"Leaving aside entirely the legal considerations involved, I feel that there is only one answer
to your inquiry, and that is, that the best interests of the commercial life of the
Philippines require the non-recognition of such a form of judgment note. Feeling that
you would want to know the reasons which impel me to adopt such a conclusion, I will
say briefly that if the Supreme Court should, by a decision, recognize such a judgment
note and thereby place the stamp of approval upon transactions of such a nature, the
entire business population of the Philippine Islands would be justified in their future
transactions with debtors in requiring, in all instances, the execution of notes of a
similar tenor, with the consequence that the debtor would thereby be deprived, to all
intents and purposes, of his day in court. It will pave the way for the practice of fraud
upon ignorant debtors. It will prove a serious drawback to the campaign being now
waged against usury.
"There is the further fear that the banks and money lenders having accounts now outstanding will
immediately require every debtor to execute that form of note and to refuse further
extensions of credit unless it is done, which the debtor under the stress of circumstances
will be compelled to accept, amounting in effect to duress.
"The recognition of such a form of obligation would be so revolutionary in character as to bring
about a complete reorganization of commercial customs and practices with reference to
short-term obligations.
"Having in mind that the Philippine National Bank is practically the only institution which can
assist the farmers and agriculturists, the practice of requiring a judgment note would place
the latter wholly at the mercy of the bank, and this is stated without any reflection on the
bank, but merely to point out one of the consequent evils which will necessarily follow if
the practice should receive the high judicial sanction which a judgment of the Supreme
Court would necessarily give to it.
"Another feature which occurs to me is that where any new enterprise is being launched, it is
universally the custom for such company to arrange with some banking institution for
credit facilities, over and above capital with which it brings business. Should it become the
custom here to require the execution of so-called judgment notes, organizers of
corporations, partnerships and the like, who have in mind to secure additional working
capital or credit facilities from banks, will be very reluctant to put their funds into any
enterprises which could be destroyed without warning by the creditor exercising the rights
which that form of transaction would give him. This would act therefore as a deterrent to
new enterprises and the development of industry through individual initiative and with
private funds.
"Let us take a very simple illustration of this. Suppose that you and I should form a partnership,
with a capital of P50,000 to buy hemp and, in connection with our business, we went to
some banking institution for the purpose of securing credit facilities, as is customary, in the
conduct of our business. Let us then suppose that the bank, taking into consideration the
capital which we ourselves had furnished and our standing in the community, was willing to
allow us a credit in the further sum of P50,000 upon signing a so called judgment note.
Would not you and I consider a long time before we would so far obligate ourselves as to
place it in the power of the bank to send their attorney over to court, upon the least
provocation or at the first unfavorable rumor, and to confess judgment in our names, which
would permit the sheriff to close to us out without even an opportunity to be heard?
"The sum and substance of the whole proposition is that such a practice is contrary to good
morals."
Attorney David C. Johnson, of Gibbs, McDonough & Johnson, states:
"It seems that under the common law a confession of judgment was only allowable by the
defendant himself, either before or after appearance and answer. The confession of
judgment by warrant of attorney is a statutory development (15 R. C. L., 656, 657; 17 Am.
and Eng. Encyc. of Law [2d ed.], 765; 11 Enc. Pl. and Pr., 973-975; Mason vs. Ward, 80 Vt.,
290; 130 A. S. R., 987, 988).
"The procedure contemplated in our code of procedure, which is contrary to that contemplated in
our code of procedure, which gives to all defendants an opportunity at least to be heard.
An action on the note in question could be so presented that the defendant would never be
summoned or notified, since an appearance and confession of judgment might be filed
simultaneously. We believe that this procedure should not be recognized in this jurisdiction
by implication, but should have legislative sanction with the rights of the defendant amply
safeguarded. We believe that section 5 of Act No. 2031 not of itself sanction any of the acts
mentioned in that section, but is only a statement regarding the negotiable character of the
instrument. Subsection A of section 5 states that he authority to sell collateral security does
not affect negotiability. As we understand the decision of the Supreme Court in the case of
Mahoney vs. Tuason (39 Phil., 952), the creditor in this jurisdiction is not authorized by law
to sell collateral security except in the manner provided in section 14 of Act No. 1508. This
would seem to reinforce our opinion.
"There are some of favorable features of a judgment note or warrant for confession of judgment,
but we believe that there are many objections which outweigh any of the advantages.
Forgery and usury are more prevalent in these Islands than in the United States. The
sanctioning of this procedure would add an additional weapon to the money lender who
desires to overreach his debtor.
"We have delayed answering your letter in order that we might consult our Mr. Gibbs, who
returned from Baguio yesterday.
"The foregoing is the consensus of opinion of the members of this firm,"
Attorney Julian Wolfson state:
"It is assumed that the only propounded is:
" 'Admitting that there may be some doubt, as to a correct solution, which solution, the
recognition of a confession of judgment, or a non-recognition of a confession of judgment,
or a non-recognition of a confession of judgment, would be for the best interests of the
commercial life of the commercial life of the Philippines?' and that no opinion is required
upon the incidental questions previously asked, as same have already been determined by
an examination of such authorities as: 23 Cys., pp. 699, 701-2-3-5-6-7, 723-5;l 6 C. J., pp.
645-6 (Notes 35 & 42); 8 C. J., p. 128 (Notes 35 & 42); 8 C. J., p. 128 (Notes 43-47); 12 C. J.,
p. 418 (Note 37); and such leading textbooks as 'Brannan's Negotiable Instruments Law'
and "Selover on Negotiable Instruments.'
"Everyone is entitled to 'his day in court.' This right may be waived after an opportunity has been
given to exercise the right, but must not and cannot be taken awaybefore an opportunity
has been given to exercise the right.
"The ordinary ship's bill of lading and the ordinary fire and marine insurance policy are generally
printed on forms prepared by the carrier and the insurer respectively, and generally contain
a clause making it a condition precedent to the institution of an action to first submit the
matter to a board of arbitration. The Supreme Court has never recognized this clause. The
reasons are stated in the opinions. Once submitted to arbitration, then another question is
raised.
"Special defenses to written instruments are common. Need we do more than cite the following
cases: Maulini vs. Serrano (28 Phil., 640); Henry W. Peabody & Co. vs. Bromfield and Ross
(38 Phil., 841); Cuyugan vs. Santos (34 Phil., 100; 39 Phil., 970).
"If the 'judgment note' (this term is used throughout for brevity and as it is the recognized term)
is to be recognized, what chance has defendant of defending as did the defendants in the
above cited cases? None!
"Often a promissory note is mere formality taken by a bank evidence of indebtedness, while the
real indebtedness may be for a superior or inferior amount incurred by way of overdraft,
letters of credit outstanding, acceptances to mature, or a thousand other forms of banking
credit. Such 'judgment notes' are generally made payable on demand. In the case at bar,
the note is made payable on demand. The real indebtedness may be partially paid, or the
liquidation may be going along too slow to suit the bank and then use is made of the
judgment note. The defendant might have a perfect defense except for the judgment note.
Would not article 1269 of the Civil Code here apply?
"The 'judgment note' is not once in a thousand times signed at the time of receiving money from
the bank. The indebtedness represented thereby is incurred in prior transactions, the
obligation became past due and the bank, as a forcible measure, produces one of these
'judgment notes,' when the debtor is absolutely helpless, and says "Sign on the dotted line'
and the debtor has no option, he signs. The minds of the parties never met. The debtor
owes the money, knows that the bank must have evidence of the indebtedness to pass the
auditors and the debtor further realizes he must accept the bank's dictation, because if he
declines, he is liable to immediate ruin, or if not that, he will never get further
accommodation from the bank. He does not realize, even if he knows, what is meant by a
'judgment note.' Again, would not article 1269 of the Civil Code here apply?
"Just a few months ago there was a suit instituted by a local bank for a large sum of money, based
on a written instrument which, on its face, seemed absolute. Special defenses were
pleaded, setting up that the instrument did not express the real understanding of the
parties and the real understanding was set up. The special defenses were fully proved and
the lower court dismissed the bank's suit. The bank did not even attempt to appeal to the
Supreme Court (See Cause No. 18239 of the Docket of the Court of First Instance of
Manila). Suppose the instrument sued on had contained a clause of confession of
judgment, what chance would defendant have had to prove his defense? None!
"Let us go a step further and see where this leads us. A is a dealer in hardware and sells B a bill of
goods. A prints a form, which he has B to sign, in which B acknowledges receipt of the
goods and in consideration thereof promises to pay A and 'a confession of judgment' clause
is inserted. The goods turn out entirely different from those ordered and invoiced. B
refuses to pay. A sues on his 'judgment note.' What chance has B? None!
"Very often a promissory note is only one of a series of documents given as security for the debt.
What about considering the other documents which bear on the transaction?
"A bank may have made certain advances and may have undertaken to make more, but fails to do
so, to the damage and prejudice of debtor. Let us assume that the bank agreed to advance
several hundred thousand pesos in installments of P60,000 each, and had advanced only
the first installment, taking a 'judgment note' for said first installment, and had failed to
advance further, to the damage of the debtor. What would become of section 97 of the
Code of Civil Procedure? How would debtor be able to exercise his right of counterclaim?
Was it ever contemplated at the time of signing the judgment note that the debtor would
not only waive defense, but absolutely shut himself out of court, as he would, according to
section 97 above cited, on his counterclaim? Yet again, would not article 1269 of the Civil
Code here apply?
"We dare not attempt to elaborate on what would happen in the provinces of the Philippines
should a 'judgment note' be held valid.
"What about the Usury Law? How could a defense be offered there? The usurious rate might not
appear on the face of the 'judgment note,' but it may be there all there all the same.
"Examples could be multiplied until the very absurdity of the proposition would be clearly seen,
even by a blind man.
"Of what possible benefit would the recognition of a "judgment note' serve ' the best interests of
the commercial life of the Philippines?' None! An honest creditor is willing to let his debtor
have his day in court and is willing to prove to the court his case. It might take slightly
longer to go through with a trial, but that cannot be considered a set-back. But, on the
hand, a dishonest creditor would take unfair advantage of a 'judgment note' and would use
it to the utmost to harass and take advantage of the poor and helpless debtor. The real
consequences likely, in fact sure, to arise from such recognition are horrible beyond words
to contemplate.
"There can be but one answer to the proposition and that is: The non-recognition of a confession
of judgment would be for the best interests of the commercial life of the Philippines."
Attorney J. G. Lawrence, of Ross & Lawrence, states:
"We are aware of no expression of our Legislature or courts which would indicate that
confessions of judgment under powers given in a promissory note are contrary to public
policy. This action was regularly brought in accordance with the provisions of the Code of
Civil Procedure and the defendant served with process. The answer, confessing judgment,
was filed in strict accordance with the powers contained in the note — a power coupled
with an interest which defendant would be estopped of denying. We think that no express
legal sanction is necessary to legalize such a proceeding.
"On the question of what ought to be the public policy of the Philippines, we hold quite a
different opinion. While the use of judgment notes might in some cases expedite the
collection of just debts, we believe that under conditions as exist here, their use should be
discouraged. They lend themselves easily to fraud in the hands of friends of a dishonest
debtor, and to extortion in the hands of usurers who are already too well equipped with
the pacto de retro.
"While we believe that the position of the bank is sound legally, we should be very glad to be
proven mistaken."
Attorney Francis B. Mahoney, of the Philippine Trust Company, states:
"I have not gone into the law and cases, except to take a glance at the subject of judgments in
Volume 15 of Ruling Case Law. However, the reasons indicated on page 651 thereof are
significant.
"Unquestionably, if our Legislature provided unmistakable terms for confession of judgment as
herein indicated, the validity and constitutionality of the enactment might be questioned as
 failing to provide those constitutional safeguards of taking a man's property only after a day
in court and after due process of law.
"This conclusion is stronger — a fortiori — where the enacting provision — if such section 5 of Act
No. 2031 may be called — is of a left-handed nature, apparently relating only to
negotiability — incidentally thus answering here your first inquiry. Whatever legal
principles there might be in favor of recognizing a confession of judgment — for example,
the matter of expediency — stronger and more vital principles oppose such recognition.

"By refusing to recognize confession of judgment under existing statutes or under general legal
principles, at the worst phase from the point of view of the plaintiff bank, there would
result only possible delay, costs and attorney's fees, which, after all, are only passed on to
the clients of the bank in the shape of interests, charges etc. If the bank has a meritorious
case, the judgment is ultimately certain as courts.
"If the defendant debtor has any defense of merit, he is given an opportunity to present it, as, for
example, in the matter of usury so common, so difficult to uncover and such an
unscrupulous rival of legitimate banking, the courts may keep their doors open to the
equities of each individual case. Whereas, if defendant, who theoretically may allege fraud
and who practically has great difficulty in proving it, must rely upon a defense of fraud, he
has little chance and the doors of the court are closed to any other defense.

"In the final analysis, the matter simmers down to: 1. Possible delay in judgment with costs, etc.
2. Certain justice in the end. 3. The eyes and doors of courts open to the equities of each
individual case. 4. Equality before the law,
or
(a) Expediting judgment. (b) Defendant debtor practically kept out of court by additional
expense and difficulty in securing a hearing. (c) Putting a strong weapon in the hands
of unscrupulous persons and taking the strength necessary to wield this weapon from
the courts.

"At first glance, if a debtor signs a document throwing away his right to be heard, the average
man has a feeling such debtor deserves to suffer the consequences. If that were the entire
story, probably he should. But what man, needing money badly enough — facing strenuous
necessity — will not in the circumstances be inclined to look on the cheerful side — to sign
and get the money, letting the future take care of itself? Such is the frailty of human nature.
Then, as the usual thing, the rich and powerful can take care of themselves, and it is usually
others who have need of courts, just laws and liberal interpretation of them.
"No doubt, banks would favor expediting judgments against their debtors, other things being
equal. And no doubt, additional delay in courts and the incidental costs thereof will be
borne by the clients of the bank. But sound banking is not established and enhanced by
harsh laws which put strong weapons in powerful hands. Contented peoples, safe laws and
sound banking usually go hand in hand."
Professor Jose A. Espiritu, of the University of the Philippines, states:
"Permit me to cite first of all the authorities that I have gathered concerning the principal
question at issue in the case mentioned in your letter, namely, "The Effect and Validity of
Confession of Judgment in the Philippines.'
"1. Confession of judgment has been defined as 'a voluntary submission to the jurisdiction of the
court, giving by consent and without the service of process, what could otherwise be
obtained by summons and complaint, and other formal proceedings, an acknowledgment
of indebtedness, upon which it is contemplated that a judgment may and will be rendered.'
(8 Cys., pp. 563, 564.)
"2. As to the general effects of confession of judgment, the following statements may be
mentioned: "A warrant to confess judgment does not destroy the negotiability of the note.
Such a note is commonly called a "judgment note." Decisions to the contrary in the States
where the Negotiable Instruments Law is now in force are abrogated thereby, since it
expressly provides that the negotiable character of an instrument otherwise negotiable is
not affected by a provision which authorizes a confession of judgment, if the instrument is
not paid at maturity. However, this statutory provision does not apply to stipulations for the
confession of judgment "prior" to maturity.' (8 C. J., p. 128, sec 222.)
"3. Nature and Requisites. 'A judgment may be rendered upon the confession of defendant,
either in an action regularly commenced against him be the issuance and service of
process, in which case the confession may be made by his attorney of record, or, without
the institution of a suit, upon a confession by defendant in person or by his attorney in fact.
It implies something more than a mere admission of a debt to plaintiff; in addition, it is
defendant's consent that a judgment shall be entered against him. . . .' (23 Cys., 699.)
"4. Statutory Provisions. 'Statutes regulating the confession of judgments without action, or
otherwise than according to the course of the common law, are strictly construed, and a
strict compliance with their provisions must be shown in order to sustain the validity of the
judgment.' (Chapin vs. Thompson, 20 Cal., 681.) 'And this applies also to statutory
restrictions upon the right to confess judgment, as that authority to confess judgment shall
not be given in the same instrument which contains the promise or obligation to pay the
debt, or that such confession shall not be authorized by any instrument executed prior to
suit brought.' (23 Cyc., 699, 700.)
"5. Warrant or Power of Attorney — Validity and Necessity. 'A judgment by confession may be
entered upon a written authority, called a warrant or letter of attorney, by which the debtor
empowers an attorney to enter an appearance for him, waive process, and confess
judgment against him for a designated sum, except where this method of proceeding is
prohibited by statute. The warrant as the basis of the judgment is generally required to be
placed on file in the clerk's office, and no judgment can be so entered until it is so filed.' (23
Cyc., 703.)
"6. Requisites and Sufficiency. 'A warrant or power of attorney to confess judgment should be in
writing and should conform to the requirements of the statute in force at the time of its
execution, although in the absence of specific statutory directions it is sufficient, without
much regard to its form, if it contains the essentials of a good power and clearly states its
purpose. It must be signed by the person whom the judgment is to be entered . . .' (23 Cyc.,
704.)
"The above quoted authorities are among the various authorities I found bearing on the question
at issue. As it can be readily seen none of them decides squarely and definitely the
questions propounded in your letter. One thing, however, seems to be clear, from the very
provision of section 5 (b) of the Negotiable Instruments Law and from the quotation No. 2
of this letter, that a provision in a note or bill of exchange authorizing a confession of
judgment in default of payment at its maturity has particular reference, in so far as Act No.
2031 is concerned, only to the negotiable character of an instrument. I do not believe that
the Legislature had the intention in passing the said Act No. 2031 to introduce in the
Philippines a new practice in our Remedial Law, namely, that of confession of judgment,
which is purely procedural in nature.
"Now as to the second question, to wit: 'Does the silence of the Code of Civil Procedure on the
subject mean that a confession of judgment cannot be recognized in this jurisdiction, or can
a judgment by confession be imported into the Philippines under general legal principles?'
Before answering this question attention is respectfully called to the quotation No. 4 of this
letter, which expressly provides that statutes regulating confession of judgment must
strictly construed and their strictly complied with to sustain the validity of judgments
rendered under such statutes. Now it being admitted that there is no express provision in
our Code of Civil Procedure authorizing or sanctioning this mode of practice in this
jurisdiction, and consequently there are no regulations provided to be followed in this
particular remedy, I am therefore of the opinion that confession of judgment should not be
deemed as imported in the Philippines under the general legal principles. 'The remedy
itself is a most summary one, and when the defendant-debtor, instead of admitting or
allowing a judgment be taken against him, presents his appearance and answers the
complaint filed against him, it seems that the trial court should not render a judgment
without first hearing the evidence that the parties may wish to submit before him, for it
may happen that the defendant-debtor may have some valid or good defenses against the
 plaintiff-creditor. This is especially true in the case of a counterclaim that the defendant
may have against the plaintiff as provided in sections 95 and 96 of the Code of Civil
Procedure. The same Code provides that in case of an omission to set up his counterclaim,
the defendant or his assignee loses all his right to bring further suit on such claim. (Sec. 97,
Act No. 190.)
"In answer to the last question, namely: 'Admitting that there may be some doubt, as to the
correct solution, which solution , the recognition of a confession of judgment, or the non-
recognition of a confession of judgment, would be for the best interests of the commercial
life of the Philippines?', I wish first of all to state what I believe to be the advantages and
disadvantages of this particular remedy. As to advantages, it can, of course be readily seen
that a confession of judgment is a quick remedy. It saves time and money as far as the
parties to the suit are concerned if the same is properly and legally brought. It saves the
court's time and the government the expense that a long litigation entails. As to its
disadvantages we may say among other things the following: 1. It may be abused in the
same way as the usurious rates of interest on loans are now in the Philippines, because a
borrower who is in great need of money might be induced, if not actually compelled, to
sign such a burdensome obligation; 2. It deprives the defendant of his day in court, and as a
consequence it will prevent him to set up and prove before the court his just claims and
other lawful defenses against the plaintiff; 3. It will create multiplicity of actions in this
jurisdiction, for if the confession of judgment has been wrongfully or unjustly entered, the
judgment debtor may start another litigation on the same subject-matter that might have
been brought before the court in case a proper trial was formally held before the rendition
of such a judgment; and 4. It does not really hold the plaintiff who has a good cause of
action against the defendant as his proofs will surely establish his claims and consequently
a judgment necessarily be rendered in his favor.
"From the above statements, I am of the opinion that unless proper regulations are duly
introduced and incorporated in our remedial law, confession of judgments, instead of
resulting advantageous to our commercial life in the Philippines, might be the sources of
abuse and oppression. The very fact that confession of judgment is a most summary and in
fact a violent remedy, it should first of all be properly regulated by statute, and those
regulations must be strictly complied with, before the court should concede to such a
remedy."

(Philippine National Bank v. Manila Oil Refining & By-Products Co., G.R. No. L-
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18103, [June 8, 1922], 43 PHIL 444-468)

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